1.2.2 Supply

Supply

Key Definitions

Supply: The amount of goods and services a business is able to produce and deliver within a specific time frame.

Indirect Taxes: Taxes that get levied by the government on certain specific goods and services. 

Subsidies: The opposite of taxation, subsidies are often given as government grants to businesses as an incentive to set up business there. 

Market Price: The price of a commodity that has been established by the market in a situation where the supply is equal to the demand. 

Supply Chain: The path a good follows from the suppliers of the raw materials, through to production of the product and storage, and then on to delivery to customers.

Supply Curve: The line showing the quantity of goods that a firm wants to supply at a given price - the higher the price, the greater the supply. 

Mechanization: The increased use of machinery instead of people in the agriculture and manufacturing industries.

What Should Firms Supply?

This is sometimes easier asked than answered. Supply is not always an easy thing to plan for. An example of this would be football tickets. If Manchester United were to play Manchester City, seats would sell out and the ticket office would sell to anyone who would be willing to pay for the tickets, and there would be the potential to create a surplus of supply. 

However this is not always the case. When planting a crop of apple trees, a farmer would know that the first crop would be ready in 2 to 5 years time, so planning ahead for the actual supply of apples from those trees in 3 years is very uncertain. This can impact the relationship with supermarket buyers, as they will only make deals with suppliers who will be able to deliver their promised quantity of apples at the right agreed time.

Profit-orientated businesses will want to supply their goods at a level that maximizes their profitability, and how much profit they will make. This is called the "profit-maximizing point", and is highly important to profit-orientated businesses. 

Factors Leading to a Change in Supply

1. Changes in the Cost of Production

These costs include the cost of materials, rent, fuel, salaries and advertising. If costs are higher, then the motivation to supply these goods are lower, due to the fact that higher production costs reduce the amount of profit the business gains per unit. However if competitors on the market see the same rising costs then the business could just increase their sales prices - if all businesses on the market increase their prices then the market share may not change significantly. 

2. Introduction of New Technology

This could massively impact production costs and efficiency. An example of this is the increased use of robots and mechanization in the manufacturing industry, as robots increase labour productivity significantly, lowering the average production cost per unit. This would make supply not only cheaper, but also more plentiful. 

3. Indirect Taxes

Indirect taxes are added on top of the original sales price of goods and services avaliable on the market. The most common indirect taxes used in the UK are VAT (Value Added Tax, added at a rate of 20% on top of the sales price) and 'duty tax' (added on to goods that the government believes to be socially undesirable, such as alcohol and petrol). If these taxes were to increase, the cost of supply would also increase, reducing the amount that companies are willing to supply. 

4. Government Subsidies

This would encourage businesses to supply goods, as the government wants to encourage the supply and therefore provide financial grants towards suppliers. The UK is currently granting massive subsidies to farmers, and in 2013 the BBC reported that a farmer received  an annual grant of £50 000 from the government to run his farm in Nottinghamshire. 

5. External Shocks

The commodity market is a global market with prices set and governed by the world market. If there is a crash in the market prices due to, for example, a decrease in demand for the products that the commodities are put in to, then the supply would also decrease as suppliers will not want to be paid low prices to supply a high value good. 

Another external shock is a natural disaster. If there were a flood or an earthquake, then the supply lines would be disrupted or destroyed, and the supply would decrease. This could cause problems for manufacturers or retailers who choose to only carry a lower stock amount, as they would inevitably run out of these products. This could lead to an increase of price for the affected goods.

6. Physical Constraints

Businesses may not be able to change between one or more of the key factors determining the supply in the short term, no matter how much they try to. If, for example, a mining company were already working at full capacity and had the opportunity to earn more profit, but they could not find any more reserves of the resources, then nothing can be done and the supply cannot be increased. 

Drawing a 'Supply Curve'

A supply curve can be drawn to show how the supply of a good or service increases when customers are willing to pay more for it. It is drawn on the assumption that suppliers are able to respond quickly to changes in demand, which would be possible if plenty of the goods or services being offered were kept in storage and if the production process is quick and flexible enough to be increased at will. An example of a supply curve is below: