What is Quantity Supplied?
In economics, quantity supplied describes the amount of goods or services that suppliers will produce and sell at a given market price. The quantity supplied differs from the actual amount of supply as, lower or higher prices influence how much supply producers actually put on the market. How supply changes in response to changes in prices is called the price elasticity of supply. The quantity supplied depends on the price level, which can be set by market forces or by a governing body by using price ceilings or floors.
Understanding Quantity Supplied
The quantity supplied is price sensitive within limits. In a free market, generally higher prices lead to a higher quantity supplied and vice versa. However, the total supply of finished goods acts as a limit as their will be a point where prices increase enough to where the quantity supplied and the total supply are one in the same. In cases like this, the residual demand for a product or service usually leads to further investment in growing production of that good or service.
- The quantity supplied is the amount of a good or service that is made available for sale at given price point.
- The quantity supplied differs from the total supply and is usually sensitive to price. At higher prices, the quantity supplied will be close to the total supply. At lower prices, the quantity supplied will be much less than the total supply.
- The quantity supplied can be influenced by many factors, including the elasticity of supply and demand, government regulation, and changes in input costs.
In the case of price decreases, the ability to reduce the quantity supplied is constrained by a few different factors depending on the good or service. One is the operational cash needs of the supplier. There are many situations where a supplier may be forced to give up profits or even sell at a loss because of cash flow requirements. This is often seen in commodity markets where barrels of oil or pork bellies must be moved as the production levels cannot be quickly turned down. There is also a practical limit to how much of a good can be stored and how long while waiting for a better pricing environment. Basically, the quantity supplied is heavily influenced by the elasticity of supply and demand. When supply and demand are elastic, they easily adjust in response to changes in prices. When they are inelastic, they do not. Inelastic goods are not always produced and consumed in equilibrium.
Determining Quantity Supplied Under Regular Market Conditions
The optimal quantity supplied is the quantity whereby consumers buy all of the quantity supplied. To determine this quantity, known supply and demand curves are plotted on the same graph. On the supply and demand graphs, quantity is in on the x-axis and demand on the y-axis.
The supply curve is upward-sloping because producers are willing to supply more of a good at a higher price. The demand curve is downward-sloping because consumers demand less quantity of a good when the price increase.
The equilibrium price and quantity are where the two curves intersect. The equilibrium point shows the price point where the quantity that the producers are willing to supply equals the quantity that the consumers are willing to purchase. This is the ideal quantity to supply. If a supplier provides a lower quantity, it is losing out on potential profits. If it supplies a higher quantity, not all of the goods it provides will sell.
Market Forces and Quantity Supplied
Market forces are generally seen as the best way to ensure the quantity supplied is optimal, as all the market participants can receive signals and adjust their expectations. That said, some goods or services have their quantity supplied dictated or influenced by the government or a government body.
In theory, this should work fine as long as the price setting body has a good read of the actual demand. Unfortunately, price controls can punish suppliers and consumers when they are off. If a price ceiling is set too low, suppliers are forced to provide a good or service no matter the cost of production. This can lead to losses and less producers. If a price floor is set too high - particularly for critical goods - consumers are forced to use more income to meet their basic needs.
In most cases, suppliers want to charge high prices and sell large amounts of goods to maximize profits. While suppliers can usually control the amount of goods available on the market, they do not control the demand for goods at different prices. As long as market forces are allowed to run freely without regulation or monopolistic control by suppliers, consumers share control of how goods sell at given prices. Consumers want to be able to satisfy their demand for products at the lowest price possible. If a good is fungible or a luxury, then consumers can curb their buying or seek alternatives. This dynamic tension in a free market ensures that most goods are cleared at competitive prices.