Question

What do you understand by market supply? Describe the determinant elements of supply.

Hint:

Market supply = sum of individual firms' supply; determinants: own price, related-good prices, input costs, technology, tax/subsidy, number of firms.

Answer 1

Step 1: Define market supply:
Market supply is the total quantity of a commodity that ALL the sellers/firms in a market are willing and able to offer for sale at a given price, during a given period of time — i.e. the horizontal summation of every individual firm's supply at that price.

Step 2: Price of the good itself:
By the law of supply, a higher price gives sellers a greater incentive to offer more of the good (it is more profitable), so price and quantity supplied are positively related.

Step 3: Price of related goods (especially goods produced from the same resources):
If the price of an alternative good that a firm could produce with the same resources rises, the firm shifts resources toward that alternative, reducing supply of the original good.

Step 4: Prices of factors of production (input costs):
If wages, raw material costs or rent rise, the cost of production increases, which reduces the profitability of supplying at the existing price and hence reduces supply (supply curve shifts left).

Step 5: State of technology:
An improvement in technology lowers the cost of producing each unit, making it profitable to supply more at every price — supply increases (curve shifts right).

Step 6: Government policy — taxes and subsidies:
A tax on production raises the effective cost, reducing supply; a subsidy lowers the effective cost, increasing supply.

Step 7: Number of firms in the industry:
As more firms enter and start producing the good, the market supply (being the sum of individual firms' supply) increases, and it falls when firms exit.

Final Answer:
Market supply is the sum of all sellers' quantities offered at a price; its determinants are the good's own price, prices of related/alternative goods, input/factor prices, technology, government tax/subsidy policy, and the number of firms in the market.