3.5. Supply
Most people have a natural understanding of demand because of the time and effort they spend shopping for good deals. It just makes sense that consumers prefer to pay as little as possible for a product. It is also logical that producers will sell more at low prices than at high prices.
But does this mean that sellers are eager to ask a low price for their products? No. Producers and sellers have different needs and interests than buyers, and prices send different messages to them than they do to buyers. As prices rise, producers hope to sell more of their products. At low prices, they begin to look for different ways to use their materials, equipment, shelf space, and other resources more profitably.
Economists call the number of items sellers will offer for sale at different prices at a particular time and place supply. And just as it is possible to develop a demand schedule for T-shirts (or any other product), it is also possible to develop a supply schedule illustrating the quantity of a product suppliers would offer for sale at different prices. Table 3-4 is the supply schedule for that day the friends conducted their survey. It shows how many T-shirts they were willing to make at different prices.
The Law of Supply. As the supply schedule shows, Lauren and Ralph would love to sell more T-shirts at high prices than at low ones. This agrees with the law of supply, which states that sellers will offer more of a product at a high price and less at a low price.
Why does the quantity of a product supplied change at different prices? The answer is that producers supply things to make a profit. The higher the price, the greater the incentive to produce and sell the product. Wouldn't you rather sell 300 shirts at $20.00 each than at $5.00 each?
If the students are willing to pay high prices for T-shirts, Lauren and Ralph may buy new and better equipment or hire a helper to produce and sell more shirts. If prices stay high, other students might notice Lauren and Ralph's success and start their own T-shirt business. However, if prices fall, they will consider the opportunity cost of using their resources to make T-shirts, and many will probably find other uses for their time and energy.
The Supply Curve. A supply curve shows the relationship between the price of a product and the number of units sellers will offer for sale. Figure 3-5 is a supply curve illustrating the data contained in the supply schedule (Table 3-4). It slopes upward, from left to right.
Changes in Supply. Like demand curves, supply curves can change or shift. When supply changes, the entire supply curve shifts either to the right (not "down") or to the left (not "up"). This is simply another way of saying that sellers will be offering either more or less of an item at each and every possible price. Any or all of the following changes are likely to affect the quantities supplied.
• Changes in the cost of production. If it costs sellers less to produce their products, they will be able to increase the supply, at the same or lower prices. Many businesses invest in research to discover ways to improve production strategies, find better and less expensive materials, and design more efficient machines to reduce production costs. Many employees suggest ways to reduce costs and improve efficiency. An increase in production costs will have the opposite effect—supply will decrease.
• Other profit opportunities. Most producers can make more than one product. If the price of a product they have not been producing (but could if they chose to) increases, many will shift their output to that product. For example, as personal computers became popular, people needed computer stands. As a result, many furniture manufacturers began to produce desks and carts specifically designed for the computer market.
• Change in the number of sellers/producers. When new businesses enter a market, the supply will increase. Mountain bikes became popular in the 1980s and the number of businesses producing and selling them has increased dramatically.
• Future expectations. If producers expect prices to increase in the future, they may increase their production now to be in position to profit later. If prices are expected to decline in the future, producers may reduce production.
If other T-shirt businesses enter the market at your school, or if your friends bought new and more efficient equipment, you could expect the supply of T-shirts to increase. An increase in supply is illustrated in Figure 3-6.
