Quantity Supplied Definition

What is the quantity supplied?

In economics, quantity supplied describes the number of goods or services that suppliers will produce and sell at a given time. market price. The quantity supplied differs from the actual quantity of supply (i.e. total supply) because price changes influence the quantity of supply that producers actually put on the market. The way the supply changes in response to price changes is called the price. elasticity supply.

Key points to remember

  • The quantity supplied is the quantity of a good or service offered for sale at a given price.
  • In a free market, higher prices tend to lead to a higher quantity of supply and vice versa.
  • The quantity supplied differs from the total supply and is generally price sensitive.
  • At higher prices, the quantity supplied will be close to the total supply, while at lower prices the quantity supplied will be much less than the total supply.
  • The quantity supplied can be influenced by many factors, including the elasticity of supply and demand, government regulation, and changes in input costs.

Understanding the quantity supplied

The quantity supplied is price sensitive within certain limits. In a free market, generally higher prices lead to greater quantity supplied and vice versa. However, the current total supply of finished goods acts as a limit, as there will be a point where prices increase enough to induce the quantity produced in the future to increase. In cases like this, the residual demand for a product or service usually results in further investment in the increasing production of that good or service.

In the event of falling prices, the ability to reduce the quantity supplied is limited by a few different factors depending on the good or service. One is the supplier’s operational cash requirements.

There are many situations where a supplier may be forced to forfeit profits or even sell at a loss due to cash flow needs. This is often seen in commodity markets where barrels of oil or pork belly need to be moved because production levels cannot be quickly turned down. There is also a practical limit to how much of a good can be stored and how long to wait for a better price environment.

The quantity supplied depends on the price level, which can be set by market forces or a governing body using price ceilings or floors.

Quantity supplied under normal market conditions

The optimal quantity supplied is the quantity that completely satisfies current demand at prevailing prices. To determine this quantity, the known supply and demand curves are plotted on the same graph. On supply and demand charts, quantity is on the x-axis and demand is on the y-axis.

The supply curve slopes upward because producers are willing to supply more of a good at a higher price. The demand curve is downward because consumers demand less quantity of a good when the price increases.

The balance price and quantity are where the two curves intersect. The balance point shows the price point where the quantity that producers are willing to supply is equal to the quantity that consumers are willing to buy.

This is the market clearing quantity to be supplied. If a supplier supplies a lower quantity, he loses potential profits. If he supplies a higher quantity, not all the goods he supplies will sell.

Factors that affect the supply curve

Three key factors influence the supply curve: technology, production costs and the price of other goods.

Technology

Technological improvements can help boost supply, making the process more efficient. These improvements shift the supply curve to the right, increasing the amount that can be produced at a given price. Now, if technology does not improve and deteriorates over time, production may suffer, forcing the supply curve to shift to the left.

Production costs

As the cost of producing a product increases, all other things being equal, the supply curve will shift to the right (less can be produced profitably at a given price). Thus, variations in production costs and input prices cause an opposite movement of supply. When production costs increase, supply decreases, and vice versa. Examples of production costs include wages and manufacturing overhead. The decrease in overhead and labor pushes the supply curve to the right (increase in supply) as it becomes cheaper to produce the goods.

Prices of other goods

The price of other goods or services can affect the supply curve. There are two types of other goods: joint products and producer substitutes. Joint products are products made together. Producer substitutes are a substitute good that can be created using the same resources.

Common products, for example, for a company raising steers are leather and beef. These products are made together. There is a direct relationship between the price of a good and the supply of its joint product. If the price of hides rises, herders raise more steers, which increases the supply of beef (a common hide product).

However, for a substitute producer, the producer can produce such and such a good. Consider a farmer who can grow soybeans or corn. If the price of corn increases, farmers will seek to grow more corn, which will reduce the supply of soybeans. Thus, an inverse relationship exists before the price of a good and the supply of the producer substitute.

Market forces and quantity supplied

Market forces are generally considered the best way to ensure that the quantity supplied is optimal, as all market participants can receive price signals and adjust their expectations. That said, some goods or services have their quantity provided dictated or influenced by the government or a government agency.

In theory, this should work well as long as the pricing body has a good reading of actual demand. Unfortunately, price control can punish providers and consumers when they are not set at rates that approximate market equilibrium. If a ceiling price is set too low, suppliers are forced to supply a good or service that may not earn the cost of production, including a normal profit]. This can lead to losses and reduce the number of producers. If a price floor is set too high, especially for essential goods, consumers are forced to use more income to meet their basic needs.

In most cases, suppliers want to charge high prices and sell large quantities of goods to maximize their profits. While suppliers can generally control the number of goods available in the market, they do not control the demand for goods at different prices. As long as market forces are allowed to operate freely without regulation or monopoly control by suppliers, consumers share control of how goods sell at given prices.

Consumers want to be able to satisfy their demand for products at the lowest possible price. If a property is fungible or a luxury, consumers may limit their purchases or seek alternatives. This dynamic tension in a free market ensures that most goods are cleared at competitive prices.

Example of quantity supplied

Take the example of an automobile manufacturer, Green’s Auto Sales, which sells automobiles. The automaker’s competitors raised prices ahead of the summer months. The average car in their market now sells for $25,000 compared to the previous average selling price of $20,000.

Green’s decides to increase its car supply to increase its profits. Prior to the summer months, she was selling 100 cars a month, generating $2 million in revenue. The cost to make and sell each car was $15,000, resulting in a net profit of $500,000 for Green.

With an average sale price of up to $25,000, the new net profit per month is $1 million. Thus, increasing the amount of cars supplied will increase Green’s profits.

FAQs

What is the difference between supply and quantity supplied?

The supply is the entire supply curve, while the quantity supplied is the exact figure supplied at a certain price. The offer, wholesale, presents all the different qualities supplied at all possible prices.

What is the difference between demand and quantity demanded?

Quantity demanded is the exact amount of a good or service demanded at a given price. More generally, demand is the ability or willingness of a buyer to pay for the good or service at the price offered. The ask represents the entire amount of the ask at each given price.

What are the factors that affect the quantity demanded?

Five key factors affect the quantity demanded: the price of the good, the income of the buyer, the price of related goods, consumer tastes, and customer expectations of future supply and price.

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