A supply schedule takes complex information about price and supply and turns it into relevant data. By scanning the supply schedule, companies can develop a plan of how to price their goods and how much inventory is needed to meet the demands of the market.
In this article, we define supply schedules and supply curves, explain the determinants of supply and the impact of changes in demand, and show you how to create a supply schedule and a supply curve.
What are supply schedules?
A supply schedule is an easy-to-read table that shows the relationship between the price of a good or service and the quantity supplied. A supply curve is a graphic that plots data points from a supply schedule. Accountants put the price of the good or service on the vertical (Y) axis and the quantity at a given price on the horizontal (X) axis.
Which factors determine supply?
Creating a supply schedule is challenging because supply itself is constantly changing due to several factors. Known as determinants of supply, these factors can affect the supply curve and the supply schedule you create.
The most common determinants of supply include:
1. Price of the good
If you work for a company that decides to increase the price of a good, the supply will also increase. This is because companies want to produce more products at a higher profit, especially if there is an increase in demand.
2. Number of suppliers in the market
The more companies that produce the same product, the higher the supply will become. In contrast, if the opportunity cost of producing a good becomes too high, suppliers will leave the market, driving the supply down.
3. Taxes and subsidies
Taxes are always part of balancing the general ledger or calculating financial equations, such as return on investment (ROI). Depending on the state and locality of your company, taxes can increase the cost of production, causing the supply to fall. If taxes are cut, the supply increases.
Subsidies are a set amount of money given to a company by the government in a particular industry. This capital helps them keep the price low, increase supply or compete with imported goods.
Weather mostly affects those in the agricultural industry, but it can also play a role in the production and supply of other goods. For example, a drought might cause the supply of almonds to fall and the price of production to increase.
5. Related goods
If your company can produce products that are closely related, you can move production to the product that you can make in large quantities. For example, if your company makes laundry detergent and dish soap, you can shift to making more dish soap when the price increases, meaning the supply of laundry detergent decreases.
6. Producer expectations and forecast
You might have to produce financial forecasts and expectations for the coming year or quarter. These forecasts play a large role in supply. If these projections show an upcoming demand for a product, your company might increase production to meet these expectations. If the demand is falling, your company may decrease supply.
7. Factors of production
Factors of production are typically considered part of overhead costs. Increased costs of raw materials, union strikes, increased wages or a change in the cost of utilities can cause supply to increase or decrease.
8. Improvements in technology
Technology plays a vital role in demand, especially in terms of automation or new production processes. For example, if you work for a company that has an excellent research and development team, they might discover new, more cost-effective ways to produce a good. This would cause an increase in supply.
These are not the only determinants of supply. Being familiar with these determinants can help you craft a better, more reliable supply schedule, even if it means altering it monthly or quarterly.
Reasons for shifts in the supply curve
When price increases, your company has an incentive to supply more product because of the extra revenue and profit involved. However, you must create supply schedules at different price points because a price change alters the supply curve. Therefore, several factors can cause the supply curve to shift:
1. A shift in supply to the right (increase in supply)
The determinants of supply often cause a shift in the supply curve to the right. This means that an increase in supply occurs when more product is supplied at a certain price.
2. A shift in supply to the left (decrease in supply)
Like an increase in supply, a decrease in supply is often caused by determinants in supply. In this scenario, the supply curve shifts to the left, causing an increase in price and a fall in supply.
3. Vertical supply curve
A vertical supply curve shows that regardless of price, the supply for a certain good is fixed. For example, helium is finite so the market will dictate the price rather than an increase in supply. This is also known as an inelastic supply curve. It is a phenomenon that only happens in a handful of markets.
4. Horizontal supply curve
If a supply curve is horizontal, it shows an extreme change in demand from consumers with only slight changes to the price. While a perfectly elastic supply curve (horizontal supply curve) is unrealistic, some examples might include everyday items such as milk, bread or eggs.
Because of the volatility of demand, price and supply, the number and types of supply curves are endless. Gaining knowledge of these four types of curves can help you explain a supply curve and a supply schedule to someone who doesn’t have an economics, finance or accounting background.
Why does the supply curve slope upward?
While many factors play a role in the supply curve, the reason the supply curve slopes upward hinges on three main factors:
1. Entry into the market
A supply curve can slope upward because of new entrants into a particular market. If you are in the finance or accounting department, you might study a supply curve or create a supply schedule because you have found value in entering a particular market. Because the price or profitability of the particular good is attractive, new entrants will emerge, driving up the overall supply.
2. Cost of production
Any time a company expands its inventory or output, the company must raise the price of the good in order to cover the increased cost of production.
3. Profitability factors
If the demand for a particular product increases, the price increases. With a higher profit margin, companies will increase demand to maximize their bottom line.
In a more general sense, the supply curve slopes upward because of the law of supply. This economic law states that, if all other factors remain constant, as the price of a product increases, the supply increases.
To illustrate this concept, consider an Italian restaurant. If patrons are willing to pay more for spaghetti than linguine, the restaurant will start to produce more spaghetti than linguine because they can make more profit from the increase in demand.
Changes in demand and its effects
Supply affects demand and demand affects supply. A change in one always creates a change ins the other. As a result, demand can play a pivotal role in creating your supply curve or supply schedule. Because of the relationship between supply and demand, you should know how changes in demand can alter your supply schedule.
Here are a few common changes in demand:
1. Change in income levels
When income levels go up, you might see an increase in buying power. This will allow consumers to pay more for a product, which can increase the price, and thus, increase the demand. The same idea applies to a decrease in income levels. When they go down, there is a decrease in buying power and a possible decrease in price and demand.
2. Change in preferences or tastes
Fads exist across all industries. Because of this change in preference by consumers, demand can rise or fall. For example, the demand for bell-bottom jeans might have been high in the 1970s, but by the 1990s, it was incredibly low.
3. Change in the age of the population
When the age of the population rises or falls, both demand and supply are affected. If the elderly population goes up, you might see an increase in demand for hearing aids or wheelchairs. Conversely, if the average age goes down, demand for playground equipment or bicycles might go up.
How to create a supply schedule and a supply curve
To create a supply schedule or a supply curve, you will need data on current supply and demand, as well as the prices your employer wishes to charge or how much they can charge for a product. This is often supplied to you by your company, but you may also have to do a market analysis to find this data.
Once you have obtained the data, you can start to construct your supply schedule and supply curve. Here is a step-by-step list to help you create the ideal supply schedule and supply curve.
1. Gather data
The most difficult part of creating a supply schedule or supply curve is to find data. Your employer may provide this data, but if they don’t, the best plan of action is to look at sales quantity and price from prior quarters or fiscal years. This will provide a substantiated basis for your supply curve and supply schedule.
2. Input data into a spreadsheet
Using the data supplied to you or the data you researched, input the quantity and price point into a spreadsheet. This allows you to see the price change based on the number of products sold. This spreadsheet will act as your supply schedule and form the basis of your supply curve.
3. Plot the points on a graph
Now that all the data is formatted in a spreadsheet, simply plot the points in the first quadrant (positive y-axis and positive x-axis) where quantity is listed horizontally and price is listed vertically.
For further reference, here is an example of a supply schedule and a supply curve pizza. In this example for a supply schedule for pizza, you’ll see both quantity and price, and how they change based on supply and price point.
Quantity / Price
25 / $10
50 / $20
75 / $30
100 / $40
As you can see from this supply schedule, the price of each pizza goes up by $10 for every 25 pizzas supplied to the market.
This is a simple idea of a more complex table or structure, but it illustrates the ease of use of a proper supply schedule.
To create a supply curve as a supplemental visual aspect for a presentation, all you need to do is plot these points on a graph. The x-axis (horizontal axis) is where quantity should go, and the y-axis (vertical axis) is where you should put the price.
You can see if the supply curve is correct if the curve slopes upward as you move from left to right. Used together, the supply curve and supply schedule are great tools to help you illustrate a point or show forecasts for quarterly reports.