Supply 1.2.2

Supply - the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.

Profit motive - the motivation of firms that operate so as to maximize their profits.

Indirect Taxes - Taxes not connected to income or proftit

Government subsidy - Government payment that covers some of the cost of an economic activity.

☆BASIC LAW OF SUPPLY☆
The basic law of supply is that as a selling price of a product rises, so businesses expand supply to the market. The higher selling price acts as an incentive for businesses to produce more and it may also attract other suppliers into the market.

There is a direct relationship between price and quantity supplied

A rise in market prices brings about an expansion of supply - producers are responding to the profit motive.
A fall in market prices brings about a contraction of supply - producers are not not responding to the profit motive.

A movement along the supply Curve is caused solely by a change in price all other factors are remaining constant

Shifters of market supply

☆ Changes of costs of production
If producers expect the price of a product to rise or fall in the future it may affect how much of that product they are willing and able to supply in the present.
Different kinds of producers may react to future price changes differently.
- For example if a farmer expects the price of corn to be higher in the future, he or she may store some of the current crop thereby decreasing supply currently.
- A manufacturer who believes the price of his or her product will rise, may run the factory for an extra shift or invest in more equipment to increase supply.

Lower unit costs mean that a business can supply more at each price - for example through higher productivity.

Higher unit costs cause an inward shift of supply e.g. a rise in wage rates or an increase in energy prices/other raw materials.

☆ Introduction of new technology
One way businesses improve their productivity an increased supply is through the use of technology. Technology involves the application of scientific methods and discoveries to the production process resulting in new products on new manufacturing techniques.

Influenced by the profit motive, manufacturers have, throughout history, used technology to make goods more efficiently. Increased automation including the use of industrial robots has led to increase the price of automobiles, computers and many other products. Improved technology helps farmers produce more food per acre. It also allows oil refiners to get more petrol out of every barrel of crude oil and helps to get that petrol to petrol stations more quickly and more safely.

In addition technological innovations such as the personal computer enable workers to be more productive. This in turn helps businesses to increase the supply of their services such as processing Insurance claims or selling airline tickets.

Therefore new technological development tends to increase supply

A good example is the 3D printing industry where the rapid development of additive manufacturing techniques has led to an explosion in supply of and demand for 3D printers.

☆Indirect Taxes
Government actions can also affect the costs of production both positively and negatively. Taxes not connected to income or profit are called indirect taxes.

- E.g an excise tax is a tax on the production or sale of a specific good or service. Excise taxes are often place on items such as alcohol and tobacco, things whos consumption the government is interested in discouraging. The Taxes increase producers costs and therefore decrease supply of these items.

Indirect taxes tend to decrease supply

☆Government subsidies
Subsidies have the opposite effect. A subsidy is a government payment that partially covers the cost of an Economic activity. The subsidies purpose is to encourage or protect that activity.

Most forms of energy production in the United States receive some form of subsidy. For example subsidies helped to doubl3 the supply of ethanol, a petrol substitute made from corn, between 2000 and 2004.

Subsidies tend to increase supply.

☆ Supply side shocks or External shocks
External shocks affect short run supply and can also affect a country's long run productive potential.
Example of shocks could be:
- Steep rise in oil and gas prices or other commodities  (DECREASE IN SUPPLY)
- Political turmoil / Strikes (DECREASE IN SUPPLY)
- Natural disasters causing sharp fall in production (DECREASE IN SUPPLY)
- Unexpected breakthroughs in production technology (INCREASE IN SUPPLY)

A good example of a major external shocks affecting many countries is a large rise or fall in the Global price of energy. Consumers demand more energy at a time when it is increasingly difficult to supply.