Supply Concept and Determinants of Supply PDF

Supply Concept and determinants of Supply INTRODUCTION TO AGRIBUSINESS WHAT IS SUPPLY? Supply Supply is defined as the quantity of a good or service that producers are willing and able to offer for sale at different prices during a given period of time. LAW OF SUPPLY The Law of Supply states tha...

Supply Concept and determinants of Supply INTRODUCTION TO AGRIBUSINESS WHAT IS SUPPLY? Supply Supply is defined as the quantity of a good or service that producers are willing and able to offer for sale at different prices during a given period of time. LAW OF SUPPLY The Law of Supply states that, all else being equal, as the price of a good or service increases, the quantity supplied also increases (and vice versa). Key Components of Supply: 1.Quantity Supplied: The specific amount of a good or service that producers are willing to sell at a particular price. 2.Price: A major determinant of supply; changes in price directly affect the quantity supplied. 3.Supply Curve: A graphical representation of the relationship between price and quantity supplied, typically upward sloping from left to right. 4.Determinants of Supply: Factors other than price that affect supply, such as: DETERMINANTS OF SUPPLY 1. Price of the Good Direct Effect: As the price of a good rises, producers are generally willing to supply more of it because of higher potential profits. DETERMINANTS OF SUPPLY 2. Cost of Production Input Costs: Changes in the prices of inputs like labor, raw materials, or machinery directly affect supply. Higher production costs decrease supply, shifting the supply curve leftward, while lower costs increase supply. Technology: Advancements in technology typically reduce production costs, increasing supply and shifting the supply curve to the right. DETERMINANTS OF SUPPLY 3. Prices of Related Goods Substitute Goods in Production: If the price of a substitute good rises, producers might allocate resources to that good, reducing the supply of the original good. Joint Products: When goods are jointly produced (e.g., beef and leather), an increase in the price of one may lead to an increase in supply of the other. DETERMINANTS OF SUPPLY 4. Expectations If producers expect higher future prices, they might reduce current supply to sell more later DETERMINANTS OF SUPPLY 5. Number of Suppliers An increase in the number of suppliers in the market increases supply. DETERMINANTS OF SUPPLY 6. Government Policies Taxes: Higher taxes (e.g., excise taxes) on production reduce supply, shifting the curve to the left. Subsidies: Government subsidies lower production costs, increasing supply and shifting the curve to the right. Regulations: Stringent regulations can increase costs and reduce supply, while deregulation can have the opposite effect. DETERMINANTS OF SUPPLY 7. External Factors Natural Events: Events like weather conditions, natural disasters, or pandemics can significantly affect supply. For example, a drought reduces agricultural supply. Global Market Trends: Changes in global supply chains or international trade policies can influence local supply. DETERMINANTS OF SUPPLY 1. Price of the Good 2. Cost of Production 3. Price of Related Goods 4. Expectations 5. Number of Suppliers 6. Government Policies 7. External Factors SUPPLY CURVE The supply curve is a graphical representation of the relationship between the price of a good or service and the quantity that producers are willing and able to supply over a specific period. It typically slopes upward from left to right, illustrating the law of supply, which states that: As the price of a good increases, the quantity supplied increases, and as the price decreases, the quantity supplied decreases, all else being equal (ceteris paribus). Key Features of the Supply 1. Axis: Curve: The horizontal axis represents the quantity supplied of the good. The vertical axis represents the price of the good. 2. Slope: The upward slope reflects the direct relationship between price and quantity supplied. Key Features of the Supply Curve: Movement Along the Curve: A change in price causes a movement along the supply curve: Increase in price → Increase in quantity supplied (move up the curve). Decrease in price → Decrease in quantity supplied (move down the curve) PROBLEM SOLVING PROBLEM SOLVING