Supply Quantity

Supply Quantity

Supply, the quantity of a commodity or service coming on the market at a price in a given period of time. The price and time qualifications are necessary because normally the higher the price offered the larger will be the quantity supplied, and the longer the period of time the more suppliers are able to adjust production to take advantage of changes in price.

Economic analysis distinguishes three periods. In the very short run supply refers to the stock of a commodity at that time, which will be fixed. This period, in which supply cannot be increased by new production, may be long in terms of clock-time; for example, the stock of houses can be increased in quantity only slowly. Fixity of stocks does not, however, mean that supplies coming forward on the market will be the same regardless of price, since the holders of stock will vary in attitude: some will not sell at any price, some will be eager to sell at relatively low prices, some only at relatively high prices. The supply coming on to the market will therefore normally increase with rising prices and decrease with falling prices (unless current prices are expected to go on rising or falling, in which case rising prices may decrease supply for a time).

Secondly, in the production short-run period supply refers to the flow of goods coming on to the market per period of time from the plant and equipment in existence. Again this period may be short or long in terms of clock-time; a tinker's equipment can be more readily varied in quantity than an oil refinery. The supply of a commodity in the production short-run period will depend on its price and its cost of production. With fixed amounts of equipment, cost per unit of output is likely eventually to rise as output expands because of scarcity and rising prices of labour or raw materials or because of diminishing returns, or both; higher prices may therefore again be necessary to call forth larger supplies. But where supply comes from very large units, it may be highly responsive to increases in demand even without an increase in price: relatively large increases in supply can therefore be sustained before cost per unit begins to rise. In every case the responsiveness of supply to changes in price will depend on the way in which costs change as output expands. In this context cost means that which could be avoided by not producing (or producing less). Thus supplies may not fall much as price falls as long as producers' current costs are covered: costs sunk into fixed equipment cannot be avoided by varying output, so the fixed equipment might as well continue to be used so long as prices cover current running costs.

Thirdly, in the production long run, both equipment and the number and character of the firms can change. Methods of production can be varied, production processes integrated or split into specialist parts. The supply of a commodity will then depend upon the rates of return to be obtained from the investment of new capital in that line of production compared with others. But the relationship is no longer simply between price and cost, for the character of the productive processes themselves, and therefore the nature of the commodities they produce, will change if the period is long enough. For example, motor-cars in the 2011's cannot be regarded as the same commodity as the motorcar of the 2000's. In the long run both the cost of production per unit and the price may fail although supply is increasing.

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