Laws of Supply

In Economics and in basic business, we need to understand how supply works so a firm can operate at optimal levels of production.

The supply curve is typically displayed as shown as it is usually used in accordance with the demand curve. What is suggests is that as the price of a good increases, the firm is likely to increase its supply of it and this is known as the law of supply. The reason the price increase will cause increases in supply is because the product is going to produce more profit since its margins are higher. Movements along a supply curve cause changes to the supply so a lower price will lead to a supply contraction whilst a higher price will lead to a supply extension.

Shifting Factors:

Certain factors are able to shift the supply curve left or right depending on their effect on supply. This suggests that at every price level, the supply is going to change.

Indirect Tax:

An indirect tax causes the price of a good to increase at every price level which effectively has the same effect as shifting the supply curve to the left. This means that overall, the supply for the good is going to decrease.

Technology and Productivity:

Improvements in technology and labour productivity will shift the supply curve to the right because the cost per unit produced is going to decrease. This is because the efficiency of all working capital is going to increase. Increases in productivity will shift the curve to the left.

Elasticity of Supply:

Elasticity of supply measures the change in supply in relation to the change of price of a good.

Firms typically aim for PES because it means they are very responsive to changes that may occur in the market. In order to increase their PES, a firm may:

• Improve their technology
• Make flexible working patterns
• Have excess production capacity

A PES>1 is known as elastic supply which means a small change in price will lead to a large change in the…