, the subject of supply and demand is studied independent of one another, though the two are intertwined later on at equilibrium point
Biggest misconception about Supply and Demand
is that they are one big subject. In actuality, there are two separate entities, with properties affecting one not affecting the other.
While there are many factors that affect demand, there is essentially only one factor that affects supply, and that is cost
. As a supplier
, the purpose of selling services or goods is simply to maximize the profits to be achieved from the transaction. The profit made is simply calculated from this formula:
(Selling Price) - (Production Cost) = Net Profit (Before Taxes)
To understand, imagine an economy with no consumers. Without demand, the supply simply depends on the willingness of the supplier to provide the items. While profit drives the business, the cost is essentially what it is all based on. For example, by selling a lollipop for 5 cents more will generate 5 cents more profit but at the same time, by lowering cost by 5 cents, you will aso make the same amount of profit
. In turn, this pattern demonstrates that cost
is a factor that affects the quantity supplied.
As well, the resources needed to create the good or service also shifts the quantity supplied in some fashion. As the cost of resources increase, the profit decrease, and therefore, they are less inclined to provide more of that good or service.
Future expectations of the prices also take command as if they are expected to increase, sellers will stockpile
, and then when the prices increase, sell it at the higher price, and get a higher profit.
In addition, if the price of a substitute in production
increases, they will provide less of the good or service.
If the price of a compliment item
drops, they will also reduce the amount of good supplied. As the price of the compliment drops, there is more of a demand for the good and of any compliment item
s. As a result, they will not receive as much profit and to offset that, they must lower the price.
Finally, if the number of suppliers decrease, they will also in turn not have as much supply to provide as before.