Supply: Represents the marginal cost of production, indicating the minimum cost of producing each unit of a good, from the first to the millionth unit.
Costs: Include both explicit (e.g., cost of inputs) and implicit costs (e.g., opportunity costs).
Determinants of Supply
Cost of Production: When costs fall, supply increases.
Input Costs: Lower input costs (wages, raw materials, rent) lead to increased supply.
Productivity: Increased productivity (e.g., using new machines, improved processes) shifts supply to the right.
Opportunity Costs: Changes in alternative products influence supply.
E.g., the supply of corn increases if the price of an alternative crop, soybeans, falls.
Expectations: Producers' expectations about future prices can alter current supply.
E.g., if oil prices are expected to rise, producers may reduce current supply to sell more in the future.
Number of Producers: More producers entering the market increase supply.
Examples and Scenarios
Price Increase of Finished Goods: The supply of cars does not increase with an increase in car prices. Instead, it affects the quantity supplied, not the supply curve.
Increase in Input Costs: If the price of components for cars rises, the supply shifts left due to increased production costs.
Changes in Related Markets: A fall in motorcycle prices may shift resources to car production, increasing car supply.
Future Price Expectations: An expected rise in future car prices decreases current supply as production is delayed.
Legal Changes: Lifting a ban on foreign cars increases supply by allowing more producers in the market.
Productivity Changes: Reduced productivity (e.g., due to distractions) increases costs and shifts supply to the left.
Key Takeaway
Supply and Marginal Cost Relationship: Supply is closely tied to the marginal cost of production. Changes in these marginal costs lead to shifts in supply.