Análisis de la oferta.

When we refer to the economy of our own country, we find that the economy, in the most recent year for which statistics are available, produced goods and services worth millions, or billions, or even perhaps trillions in the local currency. In studying the subject of production, there is a single question that economists attempt to answer: What determines the quantities of products that will be produced and offered for sale? Such an attempt requires an examination of the basic relationship between the price of a product and the quantity produced and offered for sale as well as an examination of the forces that lead to shifts in this relationship.

3.7.1 What is Quantity Supplied?

The amount of a product that firms wish to sell in some time period is called the quantity supplied of that product. Quantity supplied is a flow;

it is so much per unit of time. Note also that quantity supplied is the amount that firms are willing to offer for sale; it is not necessarily the amount that they succeed in selling.

The amount of a product that firms are willing to produce and offer for sale is influenced by the following important variables:

 Product’s own price

 Price of inputs

 Technology

 Number of suppliers

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The situation with supply is the same as with demand: there are several influencing variables, and we will not get far if we try to discover what happens when they all change at the same time. So, again, we use the convenient ceteris paribus assumption (everything else remaining constant) to study the influence of the variables, one at a time.

3.7.2 Quantity Supplied and the Law of Supply

We begin by holding all other influences constant and ask how we expect the quantity of a product supplied to vary with its own price.

A basic hypothesis of economics is that for many products, the price of the product and the quantity supplied are related positively, other things being equal. That is to say, the higher the product’s own price, the more its producers will supply; and the lower the price, the less its producers will supply.

Why might this be? It is true because the profits that can be earned from producing a product will increase if the price of that product rises while the costs of inputs used to produce it remain unchanged. This will make firms, which are in business to earn profits, wish to produce more of the product whose price has risen.

3.7.3 The Supply Schedule and the Supply Curve

The general relationship just discussed can be illustrated by a supply schedule which shows the relationship between quantities supplied of a product and the price of the product, other things being equal. A supply schedule is analogous to a demand schedule; the former shows what producers would be willing to sell, whereas the latter shows what

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households would be willing to buy, at alternative prices of the product.

Table 3-2 presents a hypothetical schedule for apples.

Table 3.1

Price per apple Quantity demanded (per week)

N.60 120

N.50 110

N.40 100

N.30 90

N.20 80

N.10 70

A supply curve, the graphical representation of the supply schedule, is illustrated in figure 3-6. Each point on the supply curve represents a specific price-quantity combination; however, the whole curve shows something more.

The supply curve represents the relationship between quantity supplied and price, other things being equal; its positive slope indicates that

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quantity supplied varies in the same direction as does price. When economists make statements about the conditions of supply, they are not referring just to the particular quantity being supplied at the moment, that is, not to just one point on the supply curve. Instead, they are referring to the entire supply curve, to the complete relationship between desired sales and all possible prices of the product.

Supply refers to the entire relationship between the quantity supplied of a product and the price of the product, other things being equal. A single point on the supply curve refers to the quantity supplied at the price.

The position and shape of the market supply curve depends on the positions and shapes of the individual firms which produce in that market.

3.7.4 Shifts in the Supply Curve

The supply curve will shift to a new position with a change in any of the variables (other than the product’s own price) that affects the amount of a product which firms are willing to produce and sell. A shift in the supply curve means that at each price, the quantity supplied will be different from before. An increase in the quantity supplied at each price is shown in figure 3-7. This change appears as a rightward shift in the supply curve. In contrast, a decrease in the quantity supplied at each appears as a leftward shift. A shift in the supply curve must be the result of a change in one of the factors that influence the quantity supplied other than the product’s own price.

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3.7.5 Influence on Supply

As indicated before, supply depends on several factors other than a good’s own price. Changes in these other factors are sources of shifts in market supply curves, just as happens with the market demand curves discussed above.

3.7.6 Price of Inputs (Changes in Costs of Production)

All things that a firm uses to produce its outputs, such as materials, labour, and machines, are called the firm’s inputs. Other things being equal, the higher the price of any input used to make a product, the less will be the profit from making that product. We expect, therefore, that the higher the price of any input used by a firm, the lower will be the amount that the firm will produce and offer for sale at any given price of the product. A rise in the price of inputs therefore shifts the supply curve to the left, indicating that less will he supplied at any given price; a fall in the cost of inputs shifts the supply curve to the right.

3.7.7 Technology

At any time, what is produced and how it is produced depends on what is known. Over time, knowledge changes; so do the quantities of individual products supplied. The technological improvements in the computer industry over the past two decades have led to a rightward shift in the supply curve.

3.7.8 Number of Firms

If firms that produce for a particular market are earning high profits, other firms may be tempted to go into that business. When the technology to produce computes for home use became available, literally hundreds of

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new firms got into the act. The popularity and profitability of the internet has led to the formation of new service providers. When new firms enter an industry, the supply curve shifts to the right. When firms go out of business or exit the market, the supply curve shifts to the left.

Suppose that the price of sugar rises. How does this affect the demand for ice cream? Sugar is an input into ice cream production. An increase in the price of an input tends to raise the cost of production and hence to lower profitability. In response to this increased cost, the ice cream producers will cut back on their supply of ice cream. At any given price of ice cream, the suppliers are now less inclined to continue producing the same amount. As they produce less, the supply curve for ice cream shifts to the left.

Figure 3-7 exhibits the shift in the supply curve to the left for any change that reduces the quantity that suppliers wish to produce at any given price, including the above ice cream example, and to the right for any change that increases the suppliers’ wish to produce at any given price.

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Self Assessment Question: List and explain the factors that might lead to a shift in the supply of a product.

3.8 Shifts in a supply Curve versus Movements along a Supply Curve A point on the supply curve shows the quantity supplied at a given price.

A movement along the supply curve shows a change in quantity supplied.

If the price of ice cream changes but everything else remains constant, there is a movement along the supply curve as the seller attempts to respond to a change in this market signal. If the price of ice cream remains the same but other factors that influence supply change, for example the price of inputs (sugar), supply changes and there will be a shift of the supply curve.

4.0 CONCLUSION

In this unit, we discussed market system and the ways firms react in a competitive market. We also examined product (output) market-market demand and individual demand, quantity supplied and the law of supply

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and shifts in demand and supply. We then put demand and supply together by studying market equilibrium and the effect of changes in demand and supply.

5.0 SUMMARY

i. A supply curve shows how much of a product a firm would supply if it could sell all it wanted at the given price. A demand curve shows how much of a product a household would buy if it could buy all it wanted at the given price.

ii. Quantity demanded and quantities supplied are always per time period: that is per day per month, or per year.

iii. The supply of goods is determined by costs of production, availability of resources, and the price of related products. Costs of production are determined by available technologies of production and input prices.

iv. The demand for a goods or services is determined by household income, the prices of other goods and services, tastes and preferences, and expectations.

v. The market supply for a product is the sum of all the quantities of a product that various sellers wish to supply at alternative prices. It is, therefore, determined by the number of sellers in the market.

vi. The market demand curve is the sum of individuals’ demand curves.

Therefore, market supply is also a function of population and its composition.

vii. Take care to distinguish between movements along supply and demand curves and shifts of these curves. When the price of a good changes, the quantity of that good demanded or supplied changes –

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that is, a movement occurs along the curve. When any other factor changes, the curves shift or change position.

viii. Market equilibrium exists only when quantity supplied equals demanded.

ix. The market system, also called the price system, performs two important and closely related functions in a society with unregulated markets. First, it provides an automatic mechanism for distributing scarce goods and services. That is, it serves as a price-rationing device for allocating goods and services to consumers when the quantity demanded exceeds the quantity supplied. Second, the price system ultimately determines both the allocation of resources among producers and the final mix of outputs.

x. To allocate scarce resources, alternative rationing devices can replace price rationing. The most common non-price rationing system is queuing, a term that simply means waiting in line. This is a form of quantity rationing.

xi. Attempts to bypass price rationing in the market and to use alternative rationing devices are much more difficult and costly than they would seem at first glance.

xii. Government price controls are policies that attempt to hold the price at some disequilibrium value that could not be maintained in the absence of the government’s intervention. Two basic government policies are price ceilings, which impose a maximum price that can be charged for a product, and price floors, which impose a minimum price.

xiii. TUTOR MARKED ASSIGNMENT

a. Discuss the term ‘price floor-the case of minimum wage laws’.

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b. Define market equilibrium. Illustrate your answer with appropriate graph.

c. Discuss the preconditions necessary for the smooth functioning of the market system.

xiv. REFERENCES/FURTHER READING

1. Farouk Zandi (2002). Economic Environment.

Commonwealth of learning, Vancouver, Canada.

2. Catherine Kerr (2002) Economic Environment. Bookthought Content Company, Commonwealth of learning, Vancouver, Canada

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Unit 2: EQUILIBRIUM ANALYSIS OF DEMAND AND SUPPLY

CONTENTS

1.0 Introduction 2.0 Objectives

3.0 Equilibrium Analysis

3.1 Effects of Shift In Demand and Supply on the Equilibrium 3.2 Effect In Shift In Supply

3.3 Interference with the Law of Supply and Demand 3.3.1 Price Ceiling: The Case of Rent Control

3.3.2 Price Floors: The Case of Minimum Wage Law.

4.0 Conclusion 5.0 Summary

6.0 Tutor Marked Assignment

7.0 References and Other Resources

1.0 INTRODUCTION

In the last three units, we have devoted considerable attention to demand and supply analysis. In the course of the analysis, we have observed that I demand analysis are concern with individual(s) purchases, while the supply analysis are concerned with the amount of a product suppliers offer to the market for sale at any given time.

Having understood these aspects, the next point of contact is to unite the two. It is this unity between demand and supply that is called equilibrium analysis. In a free market system, this equilibrium is determined by the invisible forces of demand and supply (market forces). But in other situations, the government

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normally steps in to adjust the prices for one reason or the other. It is this government intervention in the market that is considered price control. All these shall form the backbone of our discussion in this unit.