Definition: Supply is an economic term that refers to the amount of a given product or service that suppliers are willing to offer to consumers at a given price level at a given period.
What Does Economic Supply Mean?
When the price of a product is low, the supply is low. When the price of a product is high, the supply is high. This makes sense because companies are seeking profits in the market place. They are more likely to produce products with a higher price and likelihood of producing profits than not.
Factors of Supply
The factors of supply for a given product or service is related to:
- the price of the product or service
- the price of related goods or services
- the prices of production factors
- the price of inputs
- the number of production units
- production technology
- expectations of producers
- government policies
- random, natural or other factors
Suppliers must anticipate price changes and quickly react to changes in demand or price. However, some market factors are hard to predict. For instance, the yield of commodities cannot be accurately estimated, yet their yields strongly affect prices.
If the value of U.S. dollar declines compared to other currencies, American commodities will become cheaper for foreign countries to import and exports will be stimulated for the U.S. economy. Therefore, prices respond aggressively to supply.
Let’s look at an example.
Example
Alexandra sells strawberries for $2.50 per kg and the quantity supplied is 30 kg per week. So, Alexandra earns $75 per week from strawberries. However, a sudden draught lowers the quantity supplied of strawberries and Alexandra has to anticipate demand for strawberries.
In this case, since demand for strawberries cannot be met by the quantity supplied, the price of strawberries will rise dramatically. Alternatively, Alexandra can sell cranberries for $3.00 per kg. At this price level, and given that cranberries are similar products to strawberries, Alexandra can sell about 40 kg per week, thereby earning $120.
From the suppliers’ perspective, they can intensify production for strawberries to anticipate random weather phenomena that affect the quantity supplied. In doing so, they will react immediately to the increased demand for strawberries as well as to further price changes.
