Supply | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)

Lesson Objectives

Supply refers to the willingness and ability to sell a product.
Remember, production is not the same as supply.
- Production is all the product that is produced
- Some of it may be stored for selling later.
- Supply is only the part of the product that enters the market for selling purposes.
Remember, both willingness and ability to sell a product must be present for effective supply.
We see supply from producer’s perspective
- If at a certain price, the producer is able to sell the product but is not willing to sell it, the supply is not effective.
- If at a certain price, a producer wants to sell a product but is not able to sell it, the supply is in effective.

Ceteris Paribus, price and supply have a positive relationship
In other words, if the price of a product increases, its supply increases as well.
Why?
- When you increase the price of a product, many suppliers who were previously unwilling to sell the product will now be willing to do so.
- Some suppliers, who were not able to supply the product at the previous price, will now be able to do so as well.
- Both willingness and ability increases.
As such, we are an increasing graph for price and supply.
Remember, price is the independent variable here i.e. Price increases first. Supply increases AFTER IT.
Remember, we are talking about the price of the product we are considering itself, not the price of any other product.

As with demand, individual supply is the supply of one producer.
When we combine the supply of all producers for a certain product at a particular price, that becomes the market supply for the product.

As with demand, law of supply ONLY applies when price of the product itself changes first. In such cases, there is a movement along the graph. There is never a shift increase or decrease in the graph.
However, if the supply is changed due to anything other than the price of the product, we will see a shift increase or decrease in the supply.
- In such cases, the independent variable is not the price.
- Supply increases or decreases at each and every price.
For example
- The price of 1 kg of rice was 100 PKR. The price remained the same
- However, there was a massive earthquake that destroyed the rice farms.
- Naturally, this reduces the ability of the suppliers to supply rice at each and every price.
- So there will be a shift decrease.
Other such factors are
- Changes in costs
  - Remember, cost and price are different
  - Price is the amount for which a product SELLS
  - Cost is the amount spent on making a product
  - Increase the costs, there will be a shift decrease in supply as it curbs both willingness and ability to sell.
- Natural disasters
- Technological improvement
  - Shift increases supply in most cases.
  - Old products or outdated products will see shift fall in supply.
- Public policy matters as well
  - For example, a complete ban on the product will end its supply despite any price being offered.
- Price of a raw material
  - For example, if wool becomes expensive, the supply of sweaters will shift decrease.