Supply

What Is Supply?

Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph. This relates closely to the demand for a good or service at a specific price; all else being equal, the supply provided by producers will rise if the price rises because all firms look to maximize profits.

Understanding Supply

Supply and demand trends form the basis of the modern economy. Each specific good or service will have its own supply and demand patterns based on price, utility and personal preference. If people demand a good and are willing to pay more for it, producers will add to the supply. As the supply increases, the price will fall given the same level of demand. Ideally, markets will reach a point of equilibrium where the supply equals the demand (no excess supply and no shortages) for a given price point; at this point, consumer utility and producer profits are maximized.

Supply Basics

The concept of supply in economics is complex with many mathematical formulas, practical applications and contributing factors. While supply can refer to anything in demand that is sold in a competitive marketplace, supply is most used to refer to goods, services, or labor. One of the most important factors that affects supply is the good’s price. Generally, if a good’s price increases so will the supply. The price of related goods and the price of inputs (energy, raw materials, labor) also affect supply as they contribute to increasing the overall price of the good sold.

The conditions of the production of the item in supply is also significant; for example, when a technological advancement increases the quality of a good being supplied, or if there is a disruptive innovation, such as when a technological advancement renders a good obsolete or less in demand. Government regulations can also affect supply, such as environmental laws, as well as the number of suppliers (which increases competition) and market expectations. An example of this is when environmental laws regarding the extraction of oil affect the supply of such oil.

Supply is represented in microeconomics by a number of mathematical formulas. The supply function and equation expresses the relationship between supply and the affecting factors, such as those mentioned above or even inflation rates and other market influences. A supply curve always describes the relationship between the price of the good and the quantity supplied. A wealth of information can be gleaned from a supply curve, such as movements (caused by a change in price), shifts (caused by a change that is not related to the price of the good) and price elasticity. 

History of ‘Supply’

Supply in economics and finance is often, if not always, associated with demand. The law of supply and demand is a fundamental and foundational principle of economics. The law of supply and demand is a theory that describes how supply of a good and the demand for it interact. Generally, if supply is high and demand low, the corresponding price will also be low. If supply is low and demand is high, the price will also be high. This theory assumes market competition in a capitalist system. Supply and demand in modern economics has been historically attributed to John Locke in an early iteration, as well as definitively used by Adam Smith’s well-known “An Inquiry into the Nature and Causes of the Wealth of Nations,” published in 1776.

The graphical representation of supply curve data was first used in the 1800s, and then popularized in the seminal textbook “Principles of Economics” by Alfred Marshall in 1890. It has long been debated why Britain was the first country to embrace, utilize and publish on theories of supply and demand, and economics in general. The advent of the industrial revolution and the ensuing British economic powerhouse, which included heavy production, technological innovation and an enormous amount of labor, has been a well-discussed cause.

Related Terms & Concepts

Related terms and concepts to supply in today’s context include supply chain finance and money supply. Money supply refers specifically to the entire stock of currency and liquid assets in a country. Economists will analyze and monitor this supply, formulating policies and regulations based on its fluctuation through controlling interest rates and other such measures. Official data on a country’s money supply must be accurately recorded and made public periodically. The European sovereign debt crisis, which began in 2009, is a good example of the role of a country’s money supply and the global economic impact.

Global supply chain finance is another important concept related to supply in today’s globalized world. Supply chain finance aims to effectively link all tenets of a transaction, including the buyer, seller, financing institution — and by proxy the supplier — to lower overall financing costs and speed up the process of business. Supply chain finance is often made possible through a technology-based platform, and is affecting industries such as the automobile and retail sectors.