Quantity supplied in economics refers to the number of goods or services that suppliers are willing to produce and sell at a given market price. Unlike the actual amount of supply (total supply), the quantity supplied fluctuates based on price changes. These fluctuations illustrate how supply responds to price variations, a concept known as the price elasticity of supply.
Key Takeaways
- The quantity supplied represents the amount of a good or service available for sale at a specific price point.
- In a free market, higher prices typically lead to a higher quantity supplied and vice versa.
- The quantity supplied is distinct from the total supply and is usually sensitive to price changes.
- At elevated prices, the quantity supplied approaches the total supply, while at lower prices, it significantly deviates from the total supply.
- Influences on the quantity supplied include the elasticity of supply and demand, government regulations, and changes in input costs.
Understanding Quantity Supplied
The quantity supplied is price-sensitive within certain limits. In a free market, higher prices typically drive an increase in the quantity supplied. However, the total current supply of finished goods sets a limit. As prices rise, they can incentivize future production increases, leading to more investment in production.
Conversely, when prices decrease, the ability to lower the quantity supplied is influenced by several factors, such as the operational cash needs of the supplier. The quantity supplied is determined by price levels, dictated either by market forces or by governing bodies using price ceilings or floors.
Quantity Supplied Under Regular Market Conditions
The ideal quantity supplied is that which fully satisfies current demand at prevailing prices. To ascertain this quantity, supply and demand curves are plotted on the same graph, with quantity on the x-axis and price on the y-axis.
The supply curve slopes upward because producers are willing to supply more at higher prices. Conversely, the demand curve slopes downward because consumers demand less as prices increase.
The equilibrium price and quantity are where these curves intersect, indicating the price point where the quantity supplied matches the quantity demanded.
Factors That Impact the Supply Curve
Technological Advances
Technological improvements can make production processes more efficient, increasing the supply at a given price and shifting the supply curve to the right. Conversely, technological deterioration can constrain production and shift the supply curve left.
Production Costs
Rising production costs lead to a leftward shift in the supply curve, indicating that less can be produced profitably at a given price. Conversely, decreases in production costs and input prices push the supply curve to the right, increasing supply.
Price of Other Goods
The prices of related goods impact the supply curve. This includes both joint products (products produced together) and producer substitutes (alternative products that can use the same resources).
Example: A ranch raises both leather and beef. If the price of leather rises, ranchers may raise more cattle, increasing the beef supply (a joint product). Alternatively, a farmer who can grow either corn or soybeans will likely grow more corn if its price rises, decreasing the soybean supply (a producer substitute).
Market Forces and Quantity Supplied
Market forces typically ensure that the quantity supplied is optimal, as market participants receive price signals and adjust their expectations accordingly. Nonetheless, sometimes governments influence or dictate the quantity supplied through price regulations.
Effective government intervention requires accurate demand assessment. Misaligned price controls can harm suppliers and consumers, leading to losses or reduced producer engagement when price ceilings are too low or excessive consumer costs when price floors are too high.
Example of Quantity Supplied
Take Green’s Auto Sales, a carmaker increasing supply to boost profits as competitor prices rise leading into summer. Previously, at an average selling price of $20,000, they sold 100 cars per month with $2 million in revenue and $500,000 in net profits.
With the market average price now at $25,000, net profits increase to $1 million per month due to higher margins. Thus, increasing car supply boosts Green’s profits naturally.
What Is the Difference Between Supply and Quantity Supplied?
Supply is the entire supply curve, presenting all quantities that would be available at varying prices. Quantity supplied is the specific quantity made available at a certain price point.
What Is the Difference Between Demand and Quantity Demanded?
Quantity demanded represents the exact amount desired at a given price. Demand broadly includes all quantities buyers are willing to purchase at each potential price.
What Are the Factors That Affect Quantity Demanded?
Quantity demanded hinges on five key factors: the good’s price, buyers’ incomes, prices of related goods, consumer tastes, and future supply and price expectations.
The Bottom Line
Suppliers occasionally must lower profits or absorb losses due to cash flow needs, as often seen in commodity markets like oil or pork where production levels are not easily adjustable. Additionally, practical limits exist in how long goods can be stored while awaiting better pricing environments.
Related Terms: supply, demand, price elasticity, market equilibrium, price controls.
References
- University of Minnesota. “Principles of Economics 3.2 Supply”.
- Khan Academy. “What Factors Change Supply?”
