COMM1100 _ Market Supply

Market Supply and Firm Supply

  • Concept of Market Supply

    • Market supply is the aggregate of individual firms' supply at each price level.

    • To calculate market supply, sum the quantities supplied by each firm at a specific price.

  • Example of Firm Supply

    • At a price of $3 per slice:

      • Jasmine supplies 1 slice.

      • Rafael supplies 6 slices.

    • Therefore, the market supply at $3 is 1 (Jasmine) + 6 (Rafael) = 7 slices.

  • Market Supply Curve

    • To create the market supply curve, aggregate quantities supplied at multiple prices.

    • For prices below $2, only Rafael supplies since prices are too low for Jasmine.

    • As the price rises above $2, both Jasmine and Rafael contribute to the market supply, creating an upward sloping market supply curve, consistent with the law of supply.

Factors Affecting Supply

  • Price and Supply Movement

    • Changes in the price cause movements along the supply curve (increase in price = increase in quantity supplied).

    • Supply is influenced by other factors:

      • Input Prices: A decrease leads to lower marginal costs, allowing firms to supply more at lower prices.

      • Technology: Improvements can reduce production costs, enabling higher output.

      • Expectations: If firms expect future demand to drop, they may increase current supply to sell before prices fall.

  • Shift Factors

    • An increase in input prices will shift supply inwards (decreasing supply).

    • Considerable shifts can occur due to advancements in technology or changes in market expectations.

Elasticity of Supply

  • Price Elasticity of Supply

    • Price elasticity of supply measures responsiveness of quantity supplied to price changes:

      • Elastic Supply: High responsiveness; supply curve is relatively flat.

      • Inelastic Supply: Low responsiveness; supply curve is relatively steep.

  • Factors Influencing Elasticity

    • Ability to scale production.

      • If firms can easily increase/decrease production, supply is more elastic.

      • If firms face constraints (e.g. fixed inputs), supply is more inelastic.

Short Run vs. Long Run Supply Behavior

  • Short-Run Supply

    • In the short run, firms have fixed inputs which limit their ability to adjust supply in response to price changes.

    • Short-run supply tends to be relatively inelastic due to these fixed factors.

  • Long-Run Supply

    • In the long run, all inputs can be varied, allowing firms to adjust production more freely.

    • Long-run supply is generally more elastic as firms can adapt resources and capacities based on market conditions.

Entry and Exit in Perfect Competition

  • Market Dynamics

    • Entry: Firms will enter if expected revenues exceed total costs (including opportunity costs).

    • Exit: Incumbent firms exit when total revenues do not cover all production costs.

  • Profit and Loss Considerations

    • Positive Profits: Incentivizes new firms to enter when prices exceed average costs.

    • Losses: Drive existing firms to exit when prices fall below average costs.

Average Cost Curve

  • Characteristics:

    • Generally U-shaped due to:

      • Initial decreasing average costs through increased production (spreading fixed costs).

      • Eventually rising average costs as marginal production costs rise.

  • Stable Market Condition

    • Stability occurs when price equals average cost, indicating no incentive for entry or exit.

  • Graphical Representation

    • Profit occurs when price is above average cost.

    • Loss occurs when price is below average cost; this situation motivates exit from the market.