Supply in the Market: Definition, Determinants, Calculation Methods
The market supply, in simple terms, refers to the total amount of goods or services that manufacturers and producers are prepared to offer at a particular price and time. This aggregate is derived from the sum of all individual producer supplies.
Calculating Market Supply
To ascertain the market supply, we sum up the collective supply from each firm or company in the market. Similarly, to understand its function, we add up the individual supply functions of every producer. For instance, if there are ten producers offering 100 units each, the total market supply stands at 1000 units.
The market supply function for a product is calculated by aggregating the quantities supplied by each firm. Suppose the supply function for individual producers is Qs = -100 + 200P and there are ten companies in the market. In this situation, the market supply function would be Qs = 10 (-100 + 200P) = -1000 + 2000P.
The fundamental principle of supply asserts that when the price of a product escalates, the quantity supplied by each producer rises, thereby increasing overall supply.
Market Supply Curve
The market supply curve shows us the relationship between the price and the quantity supplied. This slope indicates the positive correlation between the price and the quantity supplied.
As the price increases, so does the quantity supplied. Conversely, a lower price means fewer goods or services supplied.
Determinants of Market Supply
Besides the price, several other factors influence the supply. Economists use these determinants to form the supply function and make sense of the changes in supply when the product's price fluctuates.
Some notable non-price determinants include the number of producers, technology, cost of inputs, level of competition, government subsidies, taxes, business expectations, and government regulations.
The total market supply is directly proportional to the number of producers. In other words, an increase in producers results in a higher market supply.
Non-Price Determinants
Changes in production costs, technology, and regulatory environment influence the market supply. Also, supply shocks such as natural disasters can alter market supply.
Production costs might change due to factors such as input prices, technological advancements, business taxes, transportation costs, government regulation, and producer expectations.
- Lower input and energy prices boost the profitability of producers, prompting a rise in supply by enabling them to offer more goods or services at each price. This leads to a rightward shift in the supply curve, representing an increased supply.
- Rising input and energy prices decrease profit margins, reducing the quantity supplied by producers at each price, resulting in a leftward shift in the supply curve, showing a decrease in supply.
- New technology often improves production efficiency, enabling producers to offer more goods or services at the same prices. This results in a rightward shift in the supply curve as the supply increases.
- Government subsidies financially support producers, thereby lowering their costs and encouraging higher production, causing the supply curve to shift rightward, signifying increased supply.
- Higher taxes increase the cost burden on producers, limiting their desire to supply, thus shifting the supply curve leftward, pointing to a decrease in supply.
- Transportation costs escalate due to high oil prices, inadequate infrastructure, and increased logistics costs, reducing the profitability of producers and discouraging supply, causing a leftward shift in the supply curve.
- Stricter government regulation can increase production costs or operational constraints, potentially reducing supply. In such cases, the supply curve shifts leftward, indicating diminished supply.
Producer expectations also play a significant role in the production decision-making process. When producers anticipate prices to fall, they might adopt efficiency measures and reduce production, aiming to maximize sales from existing inventory.
Lastly, the price of substitute products affects supply as well. Higher prices of substitute goods can encourage producers to increase output to attract customers with the expectation of increased demand.
References
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- Weiner, A. R., & Sche subur, E. M. (2005). Essentials of economics. Brooks/Cole, Cengage Learning.
- As the cost of inputs, such as energy or raw materials, decreases, the supply of goods and services may increase due to improved profit margins, resulting in a rightward shift in the market supply curve.
- When government regulations become stricter, production costs or operational constraints may increase, potentially leading to a decrease in overall market supply, causing the market supply curve to shift leftward.
