Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Supply Theory Supply theory is a concept in economics that explains the relationship between the price of a good or service and the amount offered by producers or sellers at a certain time. The theory of supply states that the higher the price of a good or service, the higher the quantity offered by producers or sellers, and conversely, the lower the price of a good or service, the lower the quantity supplied. There are several factors that affect supply, such as the price of goods or services, production costs, technology, government policies, the number of producers or sellers in the market, and economic and environmental factors. In economic theory, there are two types of supply, namely elastic supply and inelastic supply. Elastic supply occurs when a change in price causes a large change in the quantity supplied, whereas inelastic supply occurs when a change in price causes only a small change in the quantity supplied. Supply theory plays an important role in business decision-making, because companies must consider the factors that affect supply when determining their production levels. Low bids can lead to shortages of supply and loss of customers, while high offers can result in a surplus of unsold products and reduce company profits. In supply theory, there is the concept of a supply curve which describes the relationship between price and quantity supplied. The supply curve shows that the higher the price of a good or service, the greater the quantity supplied, whereas the lower the price of a good or service, the less quantity supplied. In addition, supply theory also relies on the concept of elasticity of supply, which measures how responsive supply is to changes in price. The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. If the elasticity of supply is greater than one, then supply is considered elastic, meaning that a small change in price can cause a large change in the quantity supplied. Conversely, if the elasticity of supply is less than one, supply is considered inelastic, meaning that a small change in price causes only a small change in the quantity supplied. Supply theory is also important in economic policy and business strategic planning. Governments and companies can use supply theory to plan pricing and production policies, and to understand the response of producers or sellers to changes in the economy or changes in market conditions. Supply theory explains the nature of the sellers in offering the commodities they will sell (Sugiarto 2007). A statement explaining the nature of the relationship between the price of a commodity and the quantity of that commodity offered by producers is known as the law of supply. In general, the higher the price of a commodity, the greater the quantity of that commodity that sellers will offer. Conversely, the lower the price of a commodity, the less quantity offered by sellers. According to Rahardja and Manurung (2008), several factors influence the supply of goods, namely: o The price of the item itself. The nature of the relationship between the price of a commodity and the quantity supplied for that commodity is known as the law of supply. In general, the higher the price of a commodity, the greater the quantity of that commodity that sellers will offer. o Price of other related goods. o Factor prices of production. o Production cost. o Production technology. o Number of sellers. o company goals. o Government policy. In terms of quantity, the supply curve shows the minimum price that encourages sellers to sell various quantities. Sellers are willing to accept a higher price for a certain amount, but not lower. In Figure 3b changes in other variables such as prices of other goods, production costs and production technology are depicted as curve shifts. The curve shifts to the right if the change is positive, and shifts to the left if the change is negative. For example, a shift in the curve due to increased technology. According to Sugiarto (2007) supply and demand analysis is an important tool for: a. Understand the price and quantity response of a commodity to changes in economic variables such as technology, consumer tastes, prices of other commodities, and prices of factors of production. b. Analyzing the competitive interaction between sellers and buyers in producing the price and quantity of a commodity. c. Shows the freedom that the market gives to consumers and producers. d. d. Analyze the effects of various government policy interventions on the market, such as price controls, quotas, taxes, subsidies, and others. In addition, there are several important concepts in supply theory, namely margin costs and margin profits. Marginal costs are additional costs that must be incurred by producers or sellers to increase production or supply, while margin gains are additional profits earned by producers or sellers from each increase in the number of sales. Supply theory can also be used to explain market mechanisms and market pricing. If the amount of supply and demand is balanced, then the price will reach an equilibrium point, where producers or sellers and consumers get the optimal profit. However, if the amount of supply or demand is not balanced, there will be excess supply or excess demand, which can affect market prices. Governments and companies can also use supply theory to plan new product development strategies, expand markets or increase their market share. By understanding the factors affecting supply and the elasticity of supply, companies can optimize their production and product offerings to achieve maximum profit. Overall, supply theory is an important concept in economics and business, because it helps to explain the relationship between price and the quantity supplied by producers or sellers at any given time. By understanding supply theory, companies and governments can make better decisions in product development, pricing, production, and business strategic decision making.