Topic: supply

Supply may be defined as a schedule of quantities that would be offered for sale at all of the possible prices that might prevail in the market. Everyone who offers an economic product for sale is a supplier.

The law of supply states that the quantity of an economic product offered for sale varies directly with its price. If prices are high suppliers will offer greater quantities for sale. If prices are low, they will offer smaller quantities for sale.

Productivity and cost must be kept in mind in order to make the best decision. It means a business must analyse the issue of costs before making its decisions. To make the decision-making process easier we try to divide cost into several different categories.

Fixed cost — the cost that a business incurs even if the plant is idle and output is zero.

Fixed costs include salaries paid to executives, interest charges on bonds, rent payments on leased properties, local and state property taxes.

Variable cost — a cost that changes with changes in the business rate of operation or output.

Total cost — is the sum of the fixed and variable costs. It takes in all the costs a business faces in the course of its operations.

Marginal cost — the extra or additional cost incurred when a business produces one additional unit of a commodity.

Overproduction of any commodity can also create difficulties, because it can lead to a glut on the market, which may cause prices to fall sharply.

Supplies of many commodities can generally be adjusted to suit market conditions. This means that changes in prices lead to changes in the quantity of a particular commodity which is made available to consumers.

The supply curve is the graphical representation of the supply function, i.e., of the relationship between price and supply. It shows us how many units of a particular commodity or service would be offered for sale at various prices, assuming that all other factors remain constant. The supply curve normally slopes upwards from left to right. This indicates that, other things being equal, more is offered for sale at higher prices.

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Topic: market price

Prices play an important role in all economic markets. If there were no price system, it would be impossible to determine a value for any goods or services. A high price, for example, is a signal for producers to produce more and for buyers to buy less. A low price is a signal for producers to produce less and for buyers to buy more. Prices serve as a link between producers and consumers.

The price system in a market economy is surprisingly flexible.

In economic markets, buyers and sellers have exactly the opposite hopes and intentions. The buyers come to the market larger to pay low prices. The sellers come to the market hoping for high prices. For this reason, adjustment process must take place when the two sides come together. This process almost always leads to market equilibrium — a situation where prices are relatively stable and there is neither a surplus nor a shortage in the market.

In most economic systems, the prices of the majority of goods and services do not change over short periods of time. In some systems it is of course possible for an individual to bargain over prices, because they are not fixed in advance. The consumer’s desire for a commodity tends to diminish as he buys more units of that commodity. Economists call this tendency the Law of Diminishing Marginal Utility.

Prices perform two important economic functions: they ration scarce resources, and they motivate production. As a general rule, the more scarce something is, the higher its price will be, and the fewer people will want to buy it. Economists describe that as the rationing effect of prices. In other words, since there is not enough of everything to go around, in a market system goods and services are allocated, or distributed, based on their price.

Price increases and decreases also send messages to suppliers and potential suppliers of goods and services. As prices rise, the increase serves to attract additional producers. Similarly, price decreases drive producers out³ of the market. In this way prices encourage producers to increase or decrease their level of output.

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