DEFINITION: In economics, the word “supply”—construed as a noun—refers to the goods of all types which individuals or businesses firms are prepared to make available for sale on the open market at a particular time and place.
ETYMOLOGY: “Supply” derives, via Middle English and Middle French, from the Latin verb suppleo, supplēre, meaning “to fill up.”
USAGE: “Supply” may refer to anything that may be offered for sale, such as raw materials, value-added goods, labor, or any other valuable or scarce resource.
More technically, “supply” in the strict economic sense is defined in relation to a specific market in a particular good.
Then, relative to that market, the supply is the amount of the good a given supplier is willing to sell at a specific price and which the supplier is capable of producing within a fixed unit of time, other factors being equal.
The supply of labor is calculated in a slightly different way. Relative to a given labor market, the labor supply is the amount of time per fixed unit (usually, week, month, or year) that individual laborers participating in that market are willing to spend working at a given wage.
Economists frequently graph supply against other economic factors. For example, in the case of the labor market, one might plot the supply of labor against the level of the wage being offered.
Presumably, one would find that the supply of labor would increase as a function of the wage being offered.
From this empirical discovery, one would then be able to infer the following general principle:
The more money a worker makes, the longer he is willing to work.
If this conclusion seems too obvious to justify all the heavy economic theorizing, such is the nature of social science. In the best cases, it usually confirms common sense.
Nevertheless, “supply” is an important concept that does allow us—especially, in conjunction with its complement, “demand”—to make many useful inferences about the way the economy works that go beyond common sense.
Good examples of such insights are the “law of supply” and the concept of “economy of scale.”
The so-called “law of supply” states the counterintuitive principle that an increase in the price of some goods—of certain types and within certain limits—will result in an increase in their supply.
One might naively think that the higher the price of a good, the fewer the number of consumers who will purchase it, leading the supplier to cut back production of the good. What the law of supply shows is that the truth, at least for most consumer goods, is just the opposite.
Namely, receiving a higher price will influence a supplier to produce more of the good. That much is in fact just common sense. But, then, the principle known as “Say’s Law” kicks in.
Say’s Law states that “supply creates its own demand,” meaning that in most cases supply increases will lead to an increase in demand, as well—thus preventing demand from falling in the case under consideration in the way one might expect.
As for the notion of “economy of scale,” this is just the observation that as the supply of a good increases, its cost-per-unit decreases, so that it is cheaper (on a per-unit basis) to produce more of a thing.
This, too, is an insight attributable to the science of economics, although not so much to economic theory as to the systematic empirical investigation of the workings of the economy.
If the concept of “economy of scale” seems intuitively obvious to us today, that is only because it is a discovery of political economy that has been very widely disseminated beyond the boundaries of the academic economics profession for a very long time—in fact, ever since the pioneering work of Adam Smith almost 250 years ago on the relation between the division of labor, production (supply), and profit.