XI. Text b supply and market price

Supply is the quantity of goods that producers are willing and able to sell at alternative prices in a given period, ceteris paribus.

The determinants of supply include:

• Technology

• Factor costs

• Other goods

• Taxes

• Expectations

• Number of sellers

Word processors, for example, are a technological improvement over standard typewriters. By making it easier to “produce” typing, they induce people to supply more typing services at every price.

When tax rates are high, people get to keep less of the income they earn. This reduction in after-tax income may make some people less willing to supply goods and services.

Expectations are also important. If you expect higher prices, lower costs, or reduced taxes, you may be more willing to perfect your skills. On the other hand, if you have bad expectations about future, you may find something else to do.

Supply shifts when the determinants change.

The law of supply states that the quantity of a good supplied in a given time period increases as its price increases, ceteris paribus.

Why does the quantity of a product supplied change if its price rises or falls? The answer is that producers supply things to make a profit. The higher the price, the greater the incentive to produce and sell the product.

According to the law of supply the general form of a supply curve is upward sloping and it indicates that larger quantities will be offered at higher prices. An increase in supply implies a rightward shift of the supply curve.

The point where the supply curve and demand curve intersect is the equilibrium (market) price. Thus, equilibrium or market price is the price at which the quantity of a good demanded in a given time period equals the quantity supplied.

At any higher price there will be a surplus – the quantity supplied exceeds the quantity demanded and at any lower price a shortage – the quantity demanded exceeds the quantity supplied at a given price. Only the equilibrium price clears the market. At that price, everyone who is willing to buy may do so, and everyone who wants to sell at that price may do so.

Shifts in demand or supply will affect market price. When everything else is held constant, an increase in demand will result in an increase in market price, and vice versa. Similarly, an increase in supply will result in a decrease in price, and vice versa.

Vocabulary notes:

to induce – змушувати, спонукати, схиляти до чогось, стимулювати

after-tax income – дохід після сплати податку

equilibrium – рівновага

upward sloping – похила направлена догори

surplus (Syn. excess) – надлишок

shortage (Syn. lack) – нестача, дефіцит

XII. Answer the following questions.

1. What is supply?

2. What are the determinants of supply?

3. What does the law of supply state?

4. What is the general form of a supply curve? What does it mean?

5. What is market price?

6. How do shifts in demand and supply affect prices?