Increase in supply

Definition

An increase in supply refers to a situation where producers are willing and able to sell more of a good or service at each price level, leading to a rightward shift in the supply curve. This phenomenon can arise from various factors that enhance production capabilities or reduce costs, which ultimately affects market equilibrium and pricing dynamics.

5 Must Know Facts For Your Next Test

1. An increase in supply leads to a lower equilibrium price if demand remains constant, as more goods are available in the market.
2. Factors contributing to an increase in supply include technological improvements that make production more efficient and reductions in input costs.
3. Government policies, such as subsidies for production, can incentivize producers to increase supply.
4. Changes in the number of suppliers in the market can also cause an increase in overall supply, as more competitors enter the industry.
5. An increase in supply is visually represented by a rightward shift of the supply curve on a graph.

Review Questions

• How does an increase in supply affect market equilibrium, and what factors can lead to this change?
  • An increase in supply typically results in a lower market equilibrium price if demand remains unchanged. This occurs because with more goods available for sale, producers compete to attract buyers, driving prices down. Factors leading to an increase in supply include advancements in technology that reduce production costs, government subsidies that lower expenses for producers, and an increase in the number of suppliers entering the market.
• Discuss how changes in production costs influence an increase in supply and provide examples.
  • Changes in production costs directly influence an increase in supply. For instance, if the cost of raw materials decreases due to improved extraction methods, producers can manufacture goods at a lower cost and may choose to increase their output. Additionally, if wages decrease or production technology advances, enabling faster or cheaper manufacturing processes, firms are likely to expand their supply as they can maintain profitability while offering lower prices.
• Evaluate the long-term implications of a sustained increase in supply on market structure and competition within an industry.
  • A sustained increase in supply can lead to significant changes in market structure and competition. As more suppliers enter the market and existing firms expand their output, increased competition typically drives prices down over time. This pressure on pricing may force less efficient firms out of business or encourage them to innovate to remain competitive. Over the long term, this dynamic can result in a more consolidated market with fewer but larger firms dominating, potentially influencing pricing power and consumer choice within the industry.

Related terms

Supply Curve: A graphical representation showing the relationship between the price of a good or service and the quantity supplied by producers.

Market Equilibrium: The point at which the quantity of a good or service demanded by consumers equals the quantity supplied by producers, determining the market price.

Determinants of Supply: Factors that can cause the supply curve to shift, including production costs, technology advancements, and number of suppliers.