In business, the term supply refers to the amount of a product or service that businesses
are prepared to sell or produce at various price ranges.
The general law of supply states that the higher the price of a particular product or
service, the greater the quantity that businesses within the market will want to supply.
In other words, the more that the consumers in the market are willing to pay for a particular
product or service, the greater the overall market supply is likely to be.
Supply is a crucially important concept in business and links closely with demand.
For example, when the supply of a popular product decreases, demand can often increase
as it causes urgency amongst consumers and makes the product more desirable.
Some business take advantage of this and purposefully limit the supply of their products in the
market which effectively increases demand and the price they can charge.
Alongside the price of a product or service, there are several key factors that influence
supply, which include: Changes in the costs of production
Introduction of new technology Indirect taxes
Government subsidies And External shocks
Let’s take a look at how each one of these factors influences supply in business with
some real world examples along the way.
First up, it’s changes in the costs of production.
The cost of producing a product is a very influential factor which impacts supply in
the market.
This could include the cost of labour, raw materials, transport, and overheads such as
rent or electricity just to name a few.
When the cost of production decreases, it’s likely that supply will increase as it becomes
more affordable for the businesses who produce and sell these products to supply them.
Let’s say for example, the raw materials that a business requires to produce a product
decrease, whether this be because the business has found a new supplier or there is a decrease
across the market.
This would result in the overall cost of production to decrease and it’s likely that the business
would then increase supply to the market.
However, an increase in the cost of production has the opposite affect and is likely to cause
supply to decrease.
For example, if the government announced a rise in the minimum wage, which has happened
on numerous occasions in recent years, this is likely to result in overall production
costs increasing as businesses must pay their employees more money.
This could lead to businesses making the decision to reduce their workforce to save money, which
in turn lowers productivity and supply to the market.
When faced with increasing production costs, businesses can also decide to pass them on
to the consumer in the form of higher prices or absorb them by leaving prices unchanged
and achieving less profit per sale.
Next up, it’s the introduction of new technology.
When new technology emerges it can often be very beneficial for businesses as it could
for example, allow them to produce more efficiently, which in turn can reduce the overall cost
of production and even provide the opportunity for the business to produce better quality
products.
All of which is likely to encourage the businesses which benefit from this new technology to
increase supply of their products and services to the market.
For example, in the banking industry, consumers were traditionally limited to their local
bank which was typically situated on their local high street.
However, due to technological advances such as the internet, computers, and smartphones
supply in the banking industry is far greater which provides consumers with a much more
competitive market and a wider choice of banks to choose from.
Whilst at the same time, banks are able to supply their products and services to a much
wider audience.
The next factor is indirect taxes.
An indirect tax is an amount of money charged by the government on a particular product
or service such as value added tax or excise tax.
Put simply, the lower the tax charged on a particular product or service, the higher
the supply is likely to be.
The government therefore play a major role in the supply of products and services across
many markets.
If the government wants to stimulate supply in a market, it can lower indirect taxes and
duties which in turn encourages businesses to produce and supply more to the market.
The sugar tax, which is officially known as the Soft Drinks Industry Levy (SDIL) is a
great example of this.
It was introduced in the UK in 2018 as part of the government’s childhood obesity strategy
with the aim of reducing sugar consumption by persuading companies to reformulate their
high sugar brands and avoid paying the levy.
This resulted in more than half of all soft drinks being reformulated to lower the sugar
content, including many of the best known soft drinks such as Fanta, Ribena, Irn-Bru
and Lucozade Which in turn reduced the supply of sugary
drinks in the market and increased the supply of sugar free drinks in the market.
We now move on to Government subsidies.
In contrast to indirect taxes, government subsidies provide businesses with financial
help and support, for example through loans, grants or tax credits.
They give an advantage to the business that receives them and are often offered to businesses
with the aim of encouraging them to increase the supply of their products and services.
The higher the subsidies offered, the more likely it is for businesses to increase supply.
Subsidies work in various ways such as being given to a business to support them to operate
and continue supplying their products and services to the market.
For example, the UK government may provide subsidies to train operators to support them
to run their services as effectively and affordably as possible to consumers.
Alternatively, a subsidy might be paid to a business for a specific reason such as the
government paying farmers a subsidy to produce milk which could be paid on a per pint basis
with the aim of reducing the farmer’s costs of production and encouraging farmers to increase
the output of milk and supply in the market.
The final factor we are going to look at is external shocks.
External shocks are random, unpredictable events which happen outside the domestic economic
system and have a widespread impact on the economy and the supply of goods and services.
Examples of external shocks which can impact the supply of goods and services include extreme
political situations and decisions, supply chain issues, and natural disasters such as
flooding and severe weather.
On a political level, Brexit has impacted the supply of many goods and services in the
UK as businesses have either found it difficult to get the raw materials or goods to supply
to their customers or tariffs which have been introduced for trading with other EU businesses
have meant they have become too expensive which has negatively impacted supply in some
markets.
In contrast, severe weather conditions can result in key raw materials not being available,
therefore businesses simply cannot produce finished goods and supply the market.
For example, wildfires and droughts across America, alongside flooding in China and Europe
have caused widespread disruption to supply of everything from lumber to chocolate in
the past decade.
So that’s it, a quick fire look at the factors which can lead to a change in supply.
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