How is Supply Measured?

Supply is the relationship between the total amount of goods or services available for purchase, in comparison to the price that people are willing-to-pay for it. Supply attempts to match demand, so that as consumer’s willingness-to-pay increases, the goods and services supplied will increase to capitalize on this strengthening price. This implies that the higher the price, the more suppliers (those who supply goods and services) want to provide goods and services to those that demand them. They do this because the more goods and services they supply at higher prices, the larger their revenues will be for their businesses.

The more important difference – apart from the obvious – between supply and demand is that supply contains an extra variable that demand does not – time. Time is fundamental to suppliers because they need to ensure that they can both:

1. Supply an increase or decrease in goods and services in response to changes for those that demand them and
2. Establish whether the changes in demand are seasonal (change with the seasons) or permanent.

Demand does not need to account for these changes and this is why time is a critical feature to the nature of supply.

The law of supply states that – ceteris parabus (all things equal) – if demand is held constant – an increase in supply leads to a decrease in price while a decrease in supply leads to an increased price. This can be illustrated graphically which is shown below:

Points X,Y and Z represent different goods and services available (G&S) at a particular time.

1. At X (P1,Q1)- the price of the G&S is low, so the quantity of G&S supplied is low.
2. At Y (P2,Q2)- the price of the G&S is intermediate, so the quantity of G&S supplied is intermediate.
3. At Z (P3,Q3)- the price of the G&S is high, so the quantity of G&S demanded is high.

Movements (change along the curve) in supply will only occur when there is a change in the price or quantity supplied of a particular good or services compared to original price/demand relationship for that good. For example, assume the current supply of Soft Drink was at point Y:

1. If the price decreased, the quantity supplied would decrease to point Z.
2. If the price increased, the quantity supplied would increase and move to point X.

Shifts (movements of the line) in supply will occur when something other than price has affected it. Continuing the soft drink example, if the current supply of Soft Drink was at point Y and:

1. The price remained at P2 but the quantity demanded decreases – the line would move from S1 to S2 and
2. An entirely new supply line would be established in response to this change.

Shifts like this would occur if a sugar cane disaster occurred and no sugar was available to produce soft drink. Suppliers would be required to supply less soft drink for the same price if there no other substitute (a good used in place of another good) available.

Remember that the supply of goods and services is driven by changes in price levels which is influenced by the amount of demand for it – suppliers only want to increase or decrease their supply if there is a demand for it. This allows them to supply more goods and services in order to make a profit.