What Is Supply? Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph. This relates closely to the demand for a good or service at a specific price; all else being equal, the supply provided by producers will rise if the price rises because all firms look to maximize profits.
Understanding Supply Supply and demand trends form the basis of the modern economy. Each specific good or service will have its own supply and demand patterns based on price, utility and personal preference. If people demand a good and are willing to pay more for it, producers will add to the supply. As the supply increases, the price will fall given the same level of demand. Ideally, markets will reach a point of equilibrium where the supply equals the demand (no excess supply and no shortages) for a given price point; at this point, consumer utility and producer profits are maximized.
Supply Basics The concept of supply in economics is complex with many mathematical formulas, practical applications and contributing factors. While supply can refer to anything in demand that is sold in a competitive marketplace, supply is most used to refer to goods, services, or labor. One of the most important factors that affects supply is the good’s price. Generally, if a good’s price increases so will the supply. The price of related goods and the price of inputs (energy, raw materials, labor) also affect supply as they contribute to increasing the overall price of the good sold.
The conditions of the production of the item in supply is also significant; for example, when a technological advancement increases the quality of a good being supplied, or if there is a disruptive innovation, such as when a technological advancement renders a good obsolete or less in demand. Government regulations can also affect supply, such as environmental laws, as well as the number of suppliers (which increases competition) and market expectations. An example of this is when environmental laws regarding the extraction of oil affect the supply of such oil.
Supply is represented in microeconomics by a number of mathematical formulas. The supply function and equation expresses the relationship between supply and the affecting factors, such as those mentioned above or even inflation rates and other market influences. A supply curve always describes the relationship between the price of the good and the quantity supplied. A wealth of information can be gleaned from a supply curve, such as movements (caused by a change in price), shifts (caused by a change that is not related to the price of the good) and price elasticity.