Supply of Goods and Services

Learner, welcome to Section 5. In this section you will explore how suppliers and sellers behave in the market. Every rational seller aims to make a profit during selling or after selling their goods in the market. People supplying a service like taxi drivers or electricians also want to make profits at the end of the day. The content of this section is based on the factors controlling supply and difference between changes in quantity supplied and changes in supply. When economists study changes in the quantity supplied the only factor considered is price. When changes in supply are studied all other factors can be considered. Supply plays a vital role in how goods and services are made available in markets across Ghana and the world at large. For example, if the price of raw materials rises for iron rod production, it will become more expensive to supply them, thereby affecting its overall market supply.

KEY IDEAS

• A change in quantity supplied refers to a movement along the supply curve due to a change in the price of the good. Conversely, a change in supply refers to a shift of the entire supply curve caused by factors such as changes in production costs or technological advancements.

• A shift in the supply curve means that at the same price, the quantity supplied changes, indicating a change in supply due to external factors. A change in quantity supplied means that only the quantity supplied changes as the price changes, not the entire supply curve.

• All other things being equal, an increase in the price of a commodity leads to an increase in its supply, as higher prices provide more incentive for producers to produce and sell more to maximize profits.

• The supply of a commodity can be influenced by the price of the good, production costs, technology, government policies, and the availability of resources. These factors determine how much producers are willing and able to supply.

Supply refers to the total amount of a specific good or service that is available to consumers at a given price over a specific period. It represents how much the market can offer for that good or service.

The relationship between the price of a good or a commodity or service and the quantity supplied is shown clearly by the supply curve or graph. A typical supply curve slopes upwards indicating that suppliers or producers are motivated to supply more at higher prices than at lower prices which shows a direct and positive relationship between price and quantity supplied. The supply curve is a graph of prices on the vertical axis against the quantities supplied on the horizontal axis as shown in Figure 5.2.

Figure 5.1: Sample supply schedule The arrows in Figure 5.1 show that when the price increases, the quantity supplied also increases, and conversely, when the price falls, the quantity supplied decreases.

Figure 5.2: Graphs showing change in quantity supplied versus price.

From the two graphs above, a change in quantity supplied can be seen as a movement along the same supply curve as a result of changes in the price of the good or service.

So, any increase in price from P1 to P2 will lead to an increase in quantities supplied from Q1 to Q2 which also leads to movement along the curve from A to B. The reverse of this is also true, a decrease in price from P2 to P1 will lead to a fall in quantity supplied from Q2 to Q1.

The table and two graphs show how the law of supply works. A price increase motivates producers to supply more of a product or service to make higher profits. As the price falls, the supplier is not motivated to supply more because this means lower profit.

Activity 5.1 The Relationship Between Price and Quantity Supplied Instructions This activity is designed to help you understand how the price of a commodity affects the quantity supplied by a rational producer. A rational producer or supplier is someone who makes sales decisions based on the available information to maximise their profit. In this case, there is only one piece of information – price.

1. Choose and agree on a Ghanaian commodity of your choice that sellers regularly sell in the market (e.g., plantain, maize, or fresh tomatoes).

2. Develop a simple questionnaire to collect the following data over five different days:

a. The price of the commodity each day,

b. The quantity of the commodity sold each day.

c. The date of each visit (make sure to go to the market or canteen on different days of the week).

3. Use the data to create a table with three columns and six rows.

Suggested table to be drawn Date Price (GH₵) Quantity Sold Day 1 Day 2 Day 3 Day 4 Day 5

4. Go to the market or canteen on five different days and collect the price and quantity data.

5. Observe and note any differences in price or quantity each day.

6. Review the table you have completed and answer the following questions:

a. How does the price of the commodity affect the quantity supplied?

b. Does the quantity supplied increase or decrease as the price changes?

Why?

c. On graph paper draw supply curve. Remember that price is always the Y-axis and quantity supplied is the X-axis.

d. Explain how the data shows the relationship between price and quantity supplied and what your graph illustrates.

7. Organise your findings in a PowerPoint presentation. Include:

a. A title slide with the names of your friend and you and the commodity you studied.

b. A slide showing the data you collected.

c. A slide with the graph showing the change in quantity supplied.

d. A slide explaining your graph and how the price affects the quantity supplied.

8. Present your findings with others who have done this activity.

Note

Be respectful, tolerant and honest when completing the table and answering the questions.

In this part of section 5 price remains the same and quantity supplied changes as a result of other factors. These factors are:

Production costs Supply will be affected when there is a change in the cost of factors or inputs like raw materials and labour. A fall in the costs of production will lead to an increase production as the producer can make more for less cost – quantity supplied increases.

An increase in the costs of production may make it unprofitable to produce so goods so production falls – quantity supplied decreases.

Advance in Technology

Supply can be increased if a faster or better production process or new machine is used.

An improvement in the level of technology may improve the speed of the production process. New technology like faster or more accurate machines – increase in the quantity supplied.

Number of suppliers When there is an increase in the number of suppliers of a good or service in the market, there is usually a general increase in the supply of such good or service. However, when the number of suppliers decreases, it leads to a fall in the supply of the good or service.

1. More suppliers producing the same goods or services leads to an increase in the quantity supplied.

2. Fewer suppliers producing a good lead to a decrease in the quantity supplied.

Government Policies

Governments often make policies which affect the market system including the production/supply of goods and services. The introduction of new taxes, money subsidies and new laws to regulate market activities influence supply. A subsidy is money paid by the government to a firm to make the cost of goods produced less expensive for the public using them. For example, fuel for transport is often subsidised in Ghana to keep transportation and energy costs lower for consumers. Subsidies increase the quantity supplied because it is more profitable for producers to increase their production. Ghana also has subsidies for products grown for farmers. Rice, maize, and other basic foods may receive subsidies to ensure food security and affordability.

Tax increases or goods cause a decrease in the quantity supplied because it increases the cost of production and reduces the profitability of a good. The reverse is true as fall in taxes makes goods more profitable, so producers supply more.

So, you now know that the supply of a commodity can be influenced by factors other than price. In this case supply is affected not as a result of a price but by changes in any of these other factors. This is known as a change in supply. Change in supply causes a movement of the supply curve to the left or right.

1. An increase in the quantity supplied causes the supply curve to move to the right.

2. A decrease in the quantity supplied causes the supply curve to move to the left.

This is illustrated in the graphs presented in Figure 5.3.

Figure 5.3: Graphs illustrating the increase and decrease in quantity supplied while the price remains con- stant (indicating a shift in the supply curve) An increase in supply due to other factors besides price will shift the supply curve from SS to S₁ S₁ leading to an increase in quantity supplied from Q₁ to Q₂ A decrease in supply due to other factors besides price will shift the supply curve from SS to S₁ S₁ leading to a decrease in quantity supplied from Q₁ to Q₂ Increase in Supply Decrease in Supply

Activity 5.2 Other Factors Affecting the Supply of Commodities Instructions This activity will help you understand the different factors (other than price) that can influence the supply of goods and services in the market.

1. Choose a local food, such as kenkey, waakye, cooked rice, gobe (gari and beans), or fish.

2. Develop questions to collect information from sellers about factors, other than price, which might affect the supply of the commodity. Questions you might ask could be like these:

a. What factors influence the amount of this commodity you can supply each day?

b. Does the availability of raw materials (e.g., fish, rice, beans) affect your ability to supply?

c. Do weather conditions (e.g., rain or dry season) impact how much of this commodity you can produce or sell?

d. How does the cost of labour affect your supply?

An example is shown below. You will have to give each seller one of these tables to fill in. Alternatively, you could fill it out yourself based on the answers they give.

Question Answer

What is the main thing (apart from price) affecting the quantity you supply of this commodity?

How does the availability of raw materials influence the quantity you supply?

How does weather influence the quantity you supply?

How does the number of suppliers affect the quantity you supply?

How does government regulation like taxes or subsidies affect your supply?

3. Visit the local market or school canteen to interview as many sellers as you possibly can who supply the commodity you have chosen and collect their responses to get different views.

4. When you have filled out all of your questionnaires you need to do some analysis. Remember you are finding out how factors other than price affect the supply of your chosen commodity. Try to answer these questions in as much detail as possible. Add points of your own if they provide important information for you.

a. look at each question in turn and try to find similarities and differences.

For example, if you have chosen kenkey, does the maize harvest affect the supply? Is this influenced by the weather? Do farmers supply less maize when the harvest is poor?

b. Identify common themes and patterns in the responses.

c. Compare the impacts of different factors (e.g., raw materials vs. labour costs).

d. Identify for which questions suppliers gave the most information.

e. Review how your data collection went. Were there any problems? Did all suppliers give a response? What would you have done differently?

5. Summarise your findings in a written report or a PowerPoint presentation.

6. Present your report or PowerPoint report to your parents at home and friends in the class.

Note

Remember to be polite and respectful when conducting the interviews.

Summary

Table 5.1 shows the differences between price versus change in quantity supplied and change in supply while price stays the same.

Criteria Change in Quantity Supplied

at different price (Movement Along the Curve) Change in Supply due to other factors, price stays the same (Shift of the Curve) Cause This occurs when the price of a product changes.

This occurs when other factors (not price) change Examples If the price of gari drops from GH¢3 to GH¢2, the quantity supplied may decrease from 10 units to 4 units. This shows a downward movement along the same supply curve.

Favourable change: If farmers use a new fertiliser that increases maize production, the supply of maize increases, shifting the entire supply curve to the right.

Examples If the price of pure water increases from GH¢1 to GH¢2, the quantity supplied may increase as sellers want to make more profit.

Government policies: If the government removes taxes on tomato farming, more farmers may supply tomatoes, increasing the supply and shifting the curve to the right.

Graph Representation

It is movement along the same supply curve (upward or downward).

It is a bodily shift of the entire supply curve either to the right (increase in supply) or to the left (decrease in supply).

Effect on

Market Quantity supplied increases or decreases.

Supply increases or decreases.

Activity 5.3 Change in Quantity Supplied Versus Change in Supply Instructions

1. Explain the following concepts

a. Change in Quantity Supplied

b. Change in Supply

2. Reflect on a product or service you see in your everyday life (such as snacks at school, fruits in the market, or airtime sold by mobile vendors).

3. Think and write about how changes in price and other factors like weather or new technology might affect the supply of that product you thought about in point 2.

4. On a graph, label the x-axis as the quantity supplied and the y-axis as the price, and sketch an upward-sloping supply curve (S). The curve should slope up from left to right.

5. Show how a change in price causes the quantity supplied to change by drawing a movement along the same supply curve. For example;

a. If the price increases, move up and to the right along the supply curve (more supply).

b. If the price decreases, move down and to the left along the supply curve (less supply).

6. Draw a graph to show the entire supply curve shifts either to the right (increase in supply) or the left (decrease in supply). Make sure price remains the same.

7. Explain the difference between a change in quantity supplied and a change in supply in your own words. Refer to the graphs you have drawn to support your explanation.

8. Compare your answers with your friends in class and at home