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When the price of goods that we commonly use increases, nobody will buy them.   At...

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manishanaidu | eNotes Newbie

Posted September 2, 2013 at 5:20 AM via web

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When the price of goods that we commonly use increases, nobody will buy them.   At that point in time how can a producer increase supply?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted September 2, 2013 at 5:33 AM (Answer #1)

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First, please note that in technical economic terms, you can never increase supply by increasing the price of a good.  A price increase can cause a change in the quantity supplied, but it cannot cause a change in supply. This is an important distinction.

In order to increase supply, a producer must create a situation in which they will be willing and able to produce more of the good at the same selling price.  Let us say that I have been producing 100 t-shirts a day at a price of $5 each.  In order to increase supply, I must be willing to produce more than 100 shirts each day while they continue to sell for $5 each.

The most common way to do this is through reducing my costs.  If I can reduce my costs, I will make more profit on each shirt.  If I can make more profit, I will be willing to produce more shirts.  Therefore, I might decrease my workers’ wages.  That will lower my costs.  However, I might lose workers that way.  So another thing to do would be to increase productivity.  I could buy better sewing machines for my workers or redesign their work spaces so that they could make each shirt in a shorter period of time.  Both of these would reduce the time it took to make each shirt and, thereby, the price I have to pay in labor costs.

So, the best way for a producer to increase supply is to reduce costs.

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