Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at different prices during a given period of time. The supply curve shows the relationship between price and quantity supplied, assuming other factors remain constant. Generally, there is a direct relationship between price and quantity supplied, which is why the supply curve normally slopes upward from left to right.
Forces behind the Supply Curve
The supply curve is mainly influenced by the behaviour of producers and their objective of earning profit. The most important force behind the supply curve is the price of the commodity itself. When the price of a good rises, producers find it more profitable to produce and sell more units. Higher prices cover higher costs of production and provide better profit margins. As a result, quantity supplied increases. On the other hand, when the price falls, production becomes less profitable, and producers reduce the quantity supplied. This movement along the supply curve due to change in price is known as extension or contraction of supply.
Cost of production is another major force behind the supply curve. If the cost of inputs such as raw materials, labour, power, and transportation is low, producers can supply more at a given price. Lower costs encourage firms to expand production. Conversely, higher input costs reduce profitability and discourage production, resulting in a lower quantity supplied at the same price.
Technology also plays an important role in shaping the supply curve. Technological improvements increase productivity and reduce per unit cost of production. With better machines, improved methods, and automation, producers can supply more output using the same resources. This strengthens the ability of firms to respond positively to higher prices.
The objectives of firms also influence supply. In a market economy, firms generally aim to maximise profits. When prices rise, the profit motive pushes firms to increase output. In some cases, firms may also aim for sales maximisation or market share, but price still remains a strong factor behind supply decisions.
Another important force is the time period. In the short run, supply is relatively inelastic because production capacity cannot be easily changed. In the long run, firms can adjust plant size, enter or exit the industry, and adopt new technology, making supply more responsive to price changes. Therefore, the supply curve tends to be flatter in the long run compared to the short run.
Shifts in Supply
A shift in supply occurs when factors other than the price of the commodity change. In this case, the entire supply curve moves either to the right or to the left. A rightward shift indicates an increase in supply, meaning more quantity is supplied at the same price. A leftward shift indicates a decrease in supply, meaning less quantity is supplied at the same price.
Changes in input prices are a key reason for shifts in supply. If the prices of raw materials, wages, or energy fall, the cost of production decreases. Producers can now supply more at each price, leading to an increase in supply and a rightward shift of the supply curve. If input prices rise, production becomes costlier, and supply decreases, causing a leftward shift.
Technological progress causes an increase in supply. Improved production techniques, better machinery, and digitalisation reduce costs and increase efficiency. This enables producers to supply more output at the same price, shifting the supply curve to the right. Conversely, technological obsolescence or breakdowns can reduce supply.
Government policies such as taxes, subsidies, and regulations significantly affect supply. Imposition of indirect taxes like GST increases the cost of production, reducing supply and shifting the supply curve to the left. On the other hand, subsidies lower production costs and encourage firms to produce more, resulting in a rightward shift in supply. Strict regulations and compliance requirements can also reduce supply, while ease of doing business measures can increase it.
Prices of related goods in production also influence supply. If the price of an alternative product that can be produced using the same resources rises, producers may shift resources to that product. This reduces the supply of the original good, shifting its supply curve to the left. If the alternative product becomes less profitable, supply of the original good increases.
Expectations of future prices play a role in supply shifts. If producers expect prices to rise in the future, they may withhold current supply to sell later at higher prices. This reduces present supply and shifts the supply curve to the left. If prices are expected to fall, producers may increase current supply, causing a rightward shift.
Natural factors and external shocks also affect supply, especially in agriculture and mining. Favourable weather conditions, good monsoons, and availability of natural resources increase supply. Natural disasters such as floods, droughts, earthquakes, or pandemics disrupt production and reduce supply, shifting the curve to the left.
Understanding supply dynamics is important in credit appraisal, inflation analysis, and policy transmission. Changes in supply influence prices, profitability of firms, and repayment capacity of borrowers. Hence, the concepts of forces behind supply and shifts in supply are not only theoretical but also have strong practical relevance in banking and economic decision-making.