Supply

What Is Supply?

Supply describes how much of a good producers are willing and able to sell at each possible price, all else equal. Graphed as an upward-sloping curve, it reflects the law of supply: as price rises, quantity supplied rises. A change in the good's own price causes a movement along the supply curve, while non-price factors shift the entire curve. An increase in input costs, such as raw materials, shifts supply left, while a cost-lowering technology improvement or the entry of new firms shifts it right. A new per-unit excise tax on producers also shifts supply left, because production becomes more costly at every price.

Why It Matters

Supply is one half of the model economists use to explain how markets set prices and quantities. Pairing supply with demand locates the equilibrium where the two curves intersect and the market clears. Understanding what moves supply, versus what merely moves along it, lets analysts predict how events ripple through a market. For example, a poor harvest raises input costs for food producers and shifts supply left, pushing prices up; a manufacturing breakthrough shifts supply right and pushes prices down. Producers also weigh expectations: if they expect a storable good's price to be much higher next month, they hold back output today, reducing current supply. These shifts drive the price signals that guide resources across an economy.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What does the law of supply state?
  All else equal, as the price of a good rises, the quantity supplied of it rises
• An increase in the cost of a key input, such as raw materials, does what to the supply curve for the finished good?
  Shifts the supply curve left (supply decreases)
• An improvement in production technology that lowers the cost of making a good does what to its supply curve?
  Shifts the supply curve right (supply increases)