Define supply and explain what causes change (shifts) of supply and Essay

Define supply and explain what causes change (shifts) of supply and how supply can determine prices. Explain what is price elast - Essay Example The curve signifies a law of supply implying the more the price is, the more a quantity is supplied. So if price is altered, the quantity supplied will be affected accordingly. There are a few assumptions associated with the law of supply as well. These include if there is no change in price for the factors of production or technique and related goods, the goal of the firm remains constant and manufacturers do not anticipate a change in the near future regarding price of the commodity. The relationship between price and related goods can go inverse if related goods price goes high e.g. a bar b q meal price will go high if the meat prices go high as the meal is dependent on meat but at the same time production will be decreased as the cost of production will increase. Technological advancement also helps increase production. The swifter a process is, the more the products will be manufactured. Fewer resources are required and consequently more can be produced. The number of suppliers entering the market impacts the prices by bringing it down due to competition (TR Jain, VK Ohri). Figure 1 Supply Shifts and Price Change or shift in supply refers to the phenomenon when this supply curve shifts either up towards the left or down towards the right. What causes such a change is the change in factors other than price resulting in an impact on the quantity being supplied. These factors are of the same commodity such as change in input price, number of suppliers or technology etc. this phenomenon is termed as change in the level of supply. Decrease in supply refers to the fact when supply drops due to change in the above mentioned factors. Similarly increase in supply refers to the fact when supply increases to change in those same factors. The companies are willing to produce more products in the same price when there is an increase in supply. Cheap available inputs or low cost production due to advancement in technology may contribute to these factors. Decrease in sup ply may be due to several reasons. One may be high cost of production because the technique is obsolete or factor prices increase. If there is a competition in market, the price of competing goods will also impact. A decrease in those prices may lead to a decrease in the product price. Similarly is number of companies in the markets decrease, this will also bring down the supply. Also, if a firm anticipates a rise in commodity price in the upcoming future, supply will be decreased. One other major factor may be due to a shift in the firm’s objectives. They might be willing to maximize their profits rather than sales (Jain and Ohri, 2010). The relationship between price and supply is held by the supply curve and stated by the law of supply. Selling chocolates will be profitable if the price of chocolates is high. Consequently chocolates will be delivered in huge quantities to meet the demand. Chocolate manufacturers will add additional resources and work on technological advan cements and supplying techniques to meet the demand. Similarly if chocolate demand decreases, the production will decrease to a level to only fulfill the demand. Therefore changes in supply and demand impact market equilibrium (Mankiw, 2003). Price Elasticity and its Determinants Price elasticity of supply is a ratio between the percentage changes in the quantity supplied to the percentage change in the price. A particular supply curve of a product as a medicine or games depicts the elasticity