Supply (economics)

The supply curve can be either for an individual seller or for the market as a whole, adding up the quantity supplied by all sellers. The quantity supplied is for a particular time period (e.g., the tons of steel a firm would supply in a year), but the units and time are often omitted in theoretical presentations.

Innumerable factors and circumstances could affect a seller's willingness or ability to produce and sell a good. Some of the more common factors are:

Number of suppliers: The market supply curve is the horizontal summation of the individual supply curves. As more firms enter the industry, the market supply curve will shift out, driving down prices.

The Law of Diminishing Marginal Returns (LDMR) shapes the SRMC curve. The LDMR states that as production increases eventually a point (the point of diminishing marginal returns) will be reached after which additional units of output resulting from fixed increments of the labor input will be successively smaller. That is, beyond the point of diminishing marginal returns the marginal product of labor will continually decrease and hence a continually higher selling price would be necessary to induce the firm to produce more and more output.

The market supply curve can be translated into an equation. For a factor j for example the market supply function is

Note: not all assumptions that can be made for individual supply functions translate over to market supply functions directly.

Complexity of production: Much depends on the complexity of the production process. Textile production is relatively simple. The labor is largely unskilled and production facilities are little more than buildingsā€”no special structures are needed. Thus, the PES for textiles is elastic. On the other hand, the PES for specific types of motor vehicles is relatively inelastic. Auto manufacture is a multi-stage process that requires specialized equipment, skilled labor, a large suppliers network and large R&D costs.
Time to respond: The more time a producer has to respond to price changes the more elastic the supply. For example, a cotton farmer cannot immediately respond to an increase in the price of soybeans.
Excess capacity: A producer who has unused capacity can quickly respond to price changes in his market assuming that variable factors are readily available.
Inventories: A producer who has a supply of goods or available storage capacity can quickly respond to price changes.