Supply and Demand Fundamentals

  • Supply Definition: The quantities of a good that sellers are willing to sell at various prices.

  • Demand Definition: The quantity of goods wanted by consumers at different price points.

  • Relationship Overview:

    • Supply is associated with sellers, while demand correlates with consumers.

The Law of Supply

  • Law of Supply Definition: Just like the law of demand, there is a direct relationship between price and quantity supplied.

    • As price increases, the quantity supplied typically increases as well.

    • Conversely, as price decreases, the quantity supplied usually falls.

  • Profit Motive:

    • Producers often want to produce more when prices are high due to higher profit margins.

    • Example: If the cost of producing a product, such as a computer, decreases due to technological advancements, producers are inclined to manufacture more as prices rise or if there's a shortage of essential components like computer chips.

Effects of Price on Supply

  • Higher Prices:

    • Encourage producers to increase supply due to higher profits.

    • Companies must balance high-margin items with low-margin items to cater to varying consumer budgets.

    • Example: Companies like Dell create diverse product lines, making high-end laptops alongside budget options (e.g., $500 laptops) to accommodate different consumer segments.

Graphical Representation of Supply and Demand

  • Demand Curve:

    • Slopes downwards from left to right, indicating that as the price of a good decreases, the quantity demanded increases.

  • Supply Curve:

    • Slopes upwards from left to right, indicating that as the price of a good increases, the quantity supplied increases.

  • Equilibrium Point:

    • The point at which supply and demand curves intersect, determining the equilibrium price and quantity in the market.

Pricing Examples

  • Hypothetical Pricing of Cereal:

    • $5 per unit leads to a sale of 50 units.

    • $4 per unit yields 41.6 units.

    • A lower price leads to decreased profit margins (e.g., $4.43 = less total profit than $5).

  • Market Challenges:

    • Entry of new competitors can affect profit margins, forcing existing companies to adjust their supply curves to remain competitive.

    • Example: Apple faced competition from companies like Samsung, requiring adjustments in supply strategies.

    • Economic impacts of crop failures or tariffs can also shift supply left (decrease in supply), such as reduced availability for cereal production due to smaller corn harvests.

Determinants of Supply

  • Categories:

    • There are six determinants that can influence supply.

  • 1. Price and Availability of Inputs:

    • Changes in the cost or availability of production inputs will directly affect supply.

  • 2. Number of Sellers:

    • Fewer sellers in the market generally allow for higher prices because of less competition.

  • 3. Technology:

    • Improvements in technology can enhance production capabilities and efficiency, directly impacting supply.

  • 4. Government Actions:

    • This includes taxes and subsidies; government initiatives can significantly influence supply due to financial support or regulatory burdens.

  • 5. Opportunity Cost of Alternative Production:

    • Decisions to produce different goods can shift supply based on the relative profitability of alternatives.

  • 6. Expectation of Future Profits:

    • If producers expect profits to rise in the future, they may increase supply now in anticipation.

Shifts vs. Movements along the Supply Curve

  • Price Changes:

    • A change in price does not shift the entire supply curve but results in a movement along the curve.

  • Surpluses and Shortages:

    • Surpluses: When quantity supplied exceeds quantity demanded. Companies typically lower prices to eliminate surpluses, benefitting consumers.

    • Shortages: When quantity demanded exceeds quantity supplied; companies often raise prices to balance this, benefitting producers.

  • Market Dynamics:

    • Free markets are expected to naturally push towards equilibrium, but distortions may occur due to profit motives or market manipulation by investors.

    • Example: Current housing market trends illustrate the challenges of surplus and shortage, with discussions around the need for increased housing supply to stabilize prices.

Conclusion

  • The understanding of supply and demand dynamics is crucial in interpreting market behavior and making informed economic decisions.

  • Producers and consumers are both impacted significantly by price changes, market entry, and overall economic conditions.

  • Continuous observation of market movements and external factors that influence them is necessary to gauge future supply and demand accurately.