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Market Supply

Market Supply

Similar to the demand of production, the market supply of a product is the horizontal summation of the individual firm’s supply schedules. The market supply is a dependent variable that will be influenced by some other factors mentioned below.

  • Price of the product
  • Prices of other products
  • Prices of the factors of productions
  • Government policies
  • Weather condition

Based on the nature of the effects, the relationship between the above factors and the supply of the product can be illustrated in two categories.

  • Price of the product

Price is the main factor that determines the producer’s margin of profit per unit. Therefore, more will be supplied to the market at a higher price than at a low price by maintaining a positive relationship between the price of the product and the quantity supplied of the same. By depicting the positive relationship the ordinary supply curve slopes upwards from left to right as shown below.

As per the above diagram, q1 number of units will be supplied to the market at the price of P.

When the price increases from “P” to “P1” the quantity supplied will increase from “Q1” to “Q2”. It can be shown by moving the relevant point along the supply curve from “a” to “b”. When the price of the product falls, the opposite will take place. In economics, the positive relationship between the price of the product and the quantity of supplies is termed as “The Theory of Supply”.

  • Other influencing factors

Change in any other factors except the price of the product changes while all the other factors remain constant, the supply of the product changes and it can be illustrated by shifting the entire supply curve either to the right or left as below

Changes in cost of production

As per the above diagram, due to the fall in the cost of production, technological development or positive change in any other factor the supplier increases the supply from “Q” to “Q1” at the same price “P”. The reason is that the total revenue of the supplier increases with the increase in supply. The negative influence of the factors will shift the supply curve to the left decreasing the quantity supplied to the market.

Some exceptions too can be observed when the producer increases supply at a lower price in order to cover up the running cost as a strategy to survive in the industry.

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