Change in Quantity Supplied
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Definition of Change in Quantity Supplied:
A change in quantity supplied is the change in the quantity a producer is willing to supply when there has been a change in the market price of the good or service it sells.
A company's supply curve illustrates the number of goods and services the company is willing to supply at every price. The quantity supplied is represented by a point on the supply curve and is the amount a producer is willing to supply of a good or service at a specific price. A supply curve slopes upward because higher prices result in higher profits and induce suppliers to increase production. The supply curve also assumes the production process and outside influences are held constant, including the technology, input costs, regulations, the number of firms in the industry, future expectations, regulations, and tax rates. A change in any of these results in a new supply curve, which economists refer to as a change in supply.
It is important to distinguish between a change in the quantity supplied and a change in supply. The graphs below illustrate the difference. On Graph 1, Jane the babysitter is willing to babysit 35 hours per month at $8.00 per hour, but 37 hours per month if she could raise her price to $9.00 an hour. Her quantity supplied has increased by 2 hours per month, only because she is able to charge a higher price. A change in price causes movement along the supply curve, or a change in the quantity supplied.
The most common reason for a change in supply is a change in the cost to provide the good or service. Technological improvements or input costs may change the cost to manufacture a product. Manufacturers are willing to furnish more of a good or service at all prices if their cost to produce the good decreases. For example, assume the price of gasoline falls $1.00 per gallon. Jane is thrilled because she can expand her market. Jane is willing to increase her babysitting hours from 35 per month to 45 per month - even if she doesn't change her price. In fact, Jane is willing to babysit more hours at every price. This is illustrated by a rightward shift of her supply curve on Graph 2.
An easy test to identify whether there would be a change in supply or a change in the quantity supplied is to ask, "Would a producer change the amount supplied if there is no change in price?". If the answer is "Yes", then there would be a change in the supply. "No" means there is a change in the quantity supplied.
Whether a small price increase results in a relatively large or small increase in the quantity supplied depends on the producer's price elasticity of supply. Firms with an elastic supply will respond quickly and aggressively to a price change. Perhaps a company has excess capacity and is able to quickly add workers if there is a price increase. Companies with an inelastic supply curve will not respond as vigorously to price changes. In this case the company may already be operating near capacity and unable to quickly ramp up production in response to a price increase.
Dig Deeper With These Free Lessons:
Supply – The Producer's Perspective
Change in Supply – When Producer Costs Change
Price Elasticity of Supply – How Does a Producer Respond to a Price Change
Supply and Demand – Producers and Consumers Reach Agreement