Supply Research Paper Starter


(Research Starters)

This paper analyzes the elements that comprise supply within an economic system. Specifically, it reviews the components and the forces that influence the ability of supply to function within a macro-economy. With a brighter spotlight on this integral concept of economics, the reader will better appreciate the approaches necessary to successful economic development, redevelopment and/or transition.

Keywords Capital; Demand; Economic Development; Keynes, J.M.; Macro-economy; Reaganomics; Supply

Economics: Supply


Stanford University professor Hau Lee once recalled a story about Volvo during the mid-1990s. The Swedish auto giant found itself with an overabundance of green vehicles in its stocks. In an effort to move the cars, Volvo's marketing and sales departments embarked on a campaign of special deals and incentives. Unfortunately, the company failed to notify the manufacturing department about its promotional endeavors. Manufacturers, as a result of this lack of communication, believed that the cars were moving so quickly due to immense popularity among consumers, and so simply reacted to the sales by producing even greater numbers of the green vehicles (Siegele, 2002).

It can be argued that a macroeconomy hinges on the relationship between two major elements. On one side are consumers — individuals or groups which, during the course of their residence within that system, require goods and services and are willing to pay to obtain them. This side of the economy, demand, has long been a focal point of policymakers and economists who adhere to the Keynesian model of economics. This school of thought identifies the consumer as pivotal to economic recovery from war, depression or recession and political and social upheaval. Keynesian economists believe that government has a role to play in revitalizing stagnant or transitional markets and systems, and that its activity should seek to reverse unemployment, mitigate taxes, increase wages and keep the cost of living affordable.

The countervailing force to demand is supply. In this component of an economic system, manufacturers, industrialists, service providers and even (one can argue) the government itself are positioned to meet the needs of consumers. Reactive to the demand of consumers, the supply side, particularly from the point of view of fiscal and economic policymakers operating with a Western-style market system, has been somewhat left to its own devices in times of economic duress or stagnation. As the various worldwide economic systems have become interconnected, however, greater attention to the health and well-being of supply has been warranted and even necessitated.

Filho, Jayme, & Libƒnio (2013) present a theoretical analysis of the relationship between international capital mobility and economic growth, seen from the perspective of demand-led growth under the post-Keynesian closures. The principle of effective demand, as originally set forth by Keynes, considers economic growth to be induced by the "temporal behavior of aggregate demand." This does not mean that the supply-side is irrelevant, but rather that demand is the dominant force in the process, Filho, Jayme, and Libƒnio explain. In open economies, a "fundamental constraint to the sustained expansion of income" is the equilibrium in the balance-of-payments. The balance-of-payments constraint is especially relevant for developing countries, since external imbalances are not automatically corrected via relative prices, argue Filho et al.

This paper analyzes the elements that comprise supply within an economic system. Specifically, it reviews the components and the forces that influence the ability of supply to function within a macro-economy. With a brighter spotlight on this integral concept of economics, the reader will better appreciate the approaches necessary to successful economic development, redevelopment and/or transition.

The Substance of Supply

Supply is a relatively unappreciated segment of macroeconomics. However, the significance of supply cannot be understated. Supply is not simply product delivery — its industries are members of a community, contributing a proportionally larger share of taxes into every level of the economy, sponsoring local events and charities and, by virtue of providing jobs, helping other businesses stay vibrant as well (such as restaurants and retailers).

As previously stated, in the symbiotic relationship between supply and demand, the latter received a considerable portion of attention from policymakers in the post-World War II era. Thanks in no small part to the popular endorsement of Keynesian theory, policymakers seeking to rebuild and revitalize national economies (as well as intra-state and local economies) have focused attention to reversing unemployment trends and lowering costs for consumers.

In the mid-1970s through the 1980s, that mode of thinking was sharply contrasted with the introduction and increasing popularity of "trickle-down" economics in the US system. With the supply-side economic policies known as "Reaganomics" (named after President Ronald Reagan), Keynesian trends were dramatically reversed, as lawmakers focused a disproportionate amount of attention on the supply side; expecting that a surge in the health of the supply side would ultimately help consumers (Harper, 2005).

Trends Magazine, in 2011, published its observation that "the pace of change has quickened and the policy pendulum has swung away from demand-side Keynesian economics and toward supply-side 'Reaganomics.'" With the emergence of Reaganomics 2.0, the authors argued, free market values "will increasingly dominate and begin pushing aside 'the planned-economy paradigm.'"

Regardless of the present view of the general public as to the viability of Reaganomics, the policies introduced that are reflective of this mode of thinking provide some insight into an area that is largely underappreciated. An illustration of the focal points of Reaganomics, therefore, will assist in understanding supply and its various components.

Put simply, supply is business. Whether its goal is to manufacture and sell a particular product, provide a service or perform some task, suppliers generate revenues (or, at least, a return on investment) based on successful delivery. Like any private citizen, businesses seek to generate maximum income with minimal expense and obstruction.


Relatively few businesses are built up from the ground without a significant financial investment infusion. Capital is an essential component of business development, as it is the fertilizer with which an entrepreneurial seed's growth is aided. The impact of capital investment is especially evident when one analyzes economic transitioning on national levels.

Foreign investment is an invaluable component of economic development in transitioning economies. In some cases, capital from abroad exceeds the money generated from private and/or domestic investors. In Vietnam, for example, the economy grew by over eight percent in 2007, its fastest rate of growth in a decade. This once-isolated communist state has been the target of countless regional investors — foreign capital and private investment far surpassed the monies issued by the Vietnamese government for business development (Muoi & Wright, 2007).

Not all national economies in need of capital investment are those of developing nations. Ireland, for example, a country that can hardly be considered a "developing nation," saw a precipitous fall in its gross domestic product in 2003 and, not coincidentally, a 20 percent drop in exports in a mere two quarters. Prior to that slough, fixed capital investment fell 12.8 percent. Without a source of financial support to aid the continuous operation of varying industries in that country, those industries faltered (O'Brien & Whyte, 2003).

Capital investment is, of course, dependent on conditions that are conducive to that business surviving for the long term. It is also reliant on an environment in which a return on that investment can take place. If interest rates in an economic system are lowered, for example, investment can take place within that economy with greater ease (Niehans, 1987).

The Reagan administration saw capital investment as an important focal point. Without creating an environment in which investors felt comfortable providing capital, Reagan's advisors believed, sustainable business development would not take hold in a tumultuous 1980s economy. Through tax incentives and breaks (the scale of which had not been seen in recent memory), it was assumed that capital flows would not be disrupted (Blinder, 1998).


Suppliers are not just producers of goods and services. They are also employers, bridging the gap between supply and demand by providing consumers with income and economic potential. In an era during which the delicate balance between supply and demand is even more fragile, employee needs can upset that balance.

The 21st century, which began with a painful worldwide recession, provides an important illustration of this risk. After the recession drew to a close, higher wages based on a higher cost of living became prevalent. While this trend gives cause for a sense of elation among consumers, it simply means...

(The entire section is 4137 words.)