Supply in Theory
The economic understanding of supply implies that it is inextricably linked to the power of demand. The fundamental economics law states that an increasing demand leads to an increase in supply. Separately, supply can be defined as a desire of a producer to offer its goods on the market at specific prices within a specified time. The law of supply states that all other factors being equal, a price increase of a good causes an increase in supply. This is because the price rise allows the producer to profit more when selling to sell more goods.
Graphically, the change in supply is reflected in the shift of the supply curve. Thus, an increase in supply is indicated as a rightward shift of the curve. It means that for a given price, the supplied quantity gets bigger. Conversely, a leftward dress is evidence of a decreased supply. Besides, a change in the quantity supplied is a movement along the supply curve with unchanged supply factors. In this case, the price factor is taken into account, and other factors are considered unchanged.
An intersection of supply and demand curves occurs at a certain point, called the equilibrium (PE and QE). The product/service is sold at the equilibrium price (the price at which the buyer is willing to buy, and the seller is ready to sell the product or provide the service). When the scion of supply moves, QE for a particular Pe also changes (increases when the supply curve shifts rightwards and decreases when it moves to the left).
Speaking about non-price factors influencing not the offer, the following can be distinguished:
- Prices of materials or technology;
- Prices for complementary or substitute goods;
- Number of sellers in the market;
- Expectations of price changes;
- Taxes and subsidies;
- Unseen circumstances (damages, natural phenomena, etc.)
All of these factors can influence the supply curve shift. When prices for materials/technology or a complementary good rise, it becomes less profitable to produce a good, so the producer will probably decrease or stop the supply. However, with an increase in substitute’s price, the supply will rise, shifting the supply curve rightwards. A high number of sellers will increase the market competition, forcing prices to fall and shifting the supply curve leftwards. Moreover, if producers expect an increase in the price of a good, they may likely want to seize the short-term production and increase supply later. Additionally, taxation or subsidies play an important role in supply regulation, influencing the curve movements affecting the cost of production. The supply can be affected by unforeseen circumstances, for example, occurred in the production chain. This would decrease supply and lead to drastic price increases.
Real Case Application
The crisis occurred due to floods and pandemics that provoked a shortage of containers resulting in massive logistics disruptions this year. An article by Tan (2021) describes the cause and effects of the supply chain crisis. Expecting the high Christmas season, retailers are now worsening the situation by simultaneously overordering. The rocketing demand threatens the shipping industry and retailers, especially those that did not manage to place an order at pre-crisis prices.
Economically speaking, what is happening in the market is called a supply shortage. Several effects influencing the interaction between demand and supply are observed: unforeseen circumstances and panic from the demand side. The logistics disruptions created a lack of quantity of goods that producers are ready to sell in a certain period. The probable rise in price resulted in a panic among the retailers pushing them to buy more before the expected price increase. Thus, we can expect that eventually, the supply curve, which already was moved leftwards, will proceed to shift in the longer term unless the crisis in the shipping industry is resolved. This would further increase the price leading to decreasing number of sellers willing to pay. The shift in supply term and the new equilibrium are illustrated on the graph below (Supply curve shifted leftwards, from S0 to S1, creating a new equilibrium E1 with a new increased equilibrium price Pe1 and a decreased quantity Qe1).
Work Cited
Tan, Weizhen. “Panic Ordering by Retailers Is Making the Supply Chain Crisis ‘Even Worse.’” CNBC, 2021.