Factors Affecting Supply.

a) The Price of the Commodity.

The price of the commodity affects the prospect of profitability of an enterprise. Every entrepreneur is assumed in economics to be engaged in production in order to achieve maximum profit. He must certainly achieve a normal return on capital invested, or there is no incentive at all to stay in the industry. Good prospects of profitability will encourage him to come in and produce the supplies required. He will expand the production of his enterprise until output reaches such a level that profit is at a maximum.

b) Conditions of Supply.

They are the costs of production, the state of technological development (the more advanced the technology, the greater the flood of supplies that pours on to the market), natural influences (hurricanes, tornadoes, hail, frost, and drought disrupt output) and abnormal political influences (war, strikes, civil unrest, government interference prevent the normal activities of production).

Thus, we must note that just as want is the basis of demand, the prospect of profitability is the basis of supply; and just as consumers vary in their demand for goods, suppliers vary in their ability to supply. This is shown in the Laws of Supply and Demand summarized as follows:

1. When the price of a commodity falls the quantity that is demanded will be increased.

2. When the price of a commodity rises the quantity that is supplied will be increased.

3. Prices will adjust to that level which equates demand and supply.

4. All increased supply lowers market price and causes an extension of demand.

5. A decreased supply raises market price and causes a reduction of demand.

6. A decreased demand lowers price and also brings about a reduction of supply.

7. An increased demand raises price and also brings about an extension of supply.

TASKS

I. Give the English equivalents to:

Спрос и предложение, покупательная способность, товары и услуги, предприниматель, прибыльность (рентабельность) предприятия, вложенный капитал, расширять производство, поставщики.

II. Give one word from the text which matches the following definition:

A thing used instead of something else; things that are desired; any article that can be bought and sold; a person who buys goods; a person who buys goods that he will use himself; the amount of a particular good or service that will be bought by consumers at a given price; all the money coming in to an individual or a business firm.

III. Explain in your own words:

1. The population is able to back its “wants” with purchasing power.

2. Many families will never be in the car-buying income range.

3. Every entrepreneur must achieve a normal return on capital invested.

4. The great flood of supplies pours onto the market.

IV. Answer the following questions:

1. What is the demand for a particular good or service? Distinguish “demand” from “want”.

2. What is the supply of particular goods or services? What motivates an entrepreneur to supply a commodity or service?

3. What are the determinants of demand and supply?

4. What is the basis of a scale of preferences?

5. What are the seven laws of demand and supply?

V. Are the following statements true or false? Correct the false ones:

1. Man’s wants and demands are unlimited.

2. Price is decided by the interaction of demand and supply.

3. Demand is set.

4. If there is an alternative to a commodity, then it is no longer a necessity.

5. The price of a substitute cannot seriously affect the price of a good.

6. A progressive system of taxation strengthens the purchasing power of consumers.

7. The least preferred items are put on the top of the scale of preferences.

8. Even when a good is free, the amount wanted will be limited.

9. Supply describes the behavior of buyers.

VI. Explain what will happen to the demand for apples if:

1. Workers get a 10% pay raise.

2. The price for oranges and pears has fallen.

3. A health report is published saying that apples should be part of everyone’s diet.

VII. Explain what will happen to the supply of apples if:

1. Workers on farms growing apples get a 10% pay raise.

2. A new type of tree is introduced which produces 50% more apples per acre of apple orchard.

3. The price of pears doubles and stays very high over a number of years.

4. The apple crop is ruined by bad weather.

VIII. Here are some of the laws of supply and demand. Read them very carefully and correct the mistakes where necessary:

1. When the price of a commodity falls the quantity that is demanded will also fall.

2. When the price of a commodity rises the quantity that is supplied will increase.

3. A decreased supply lowers market price.

4. An increased demand raises price and brings about an extension of supply.

IX. Fill in the gaps with the words below:

Free, supply, quantity, fall, purchase, produce, supply, price, rise, quantity

Demand is not a particular __1__ such as six bars of chocolate, but rather a full description of the __2__ of chocolate the buyer would __3__ at every __4__ which might be charged. Even when chocolate is __5__ only a limited amount will be wanted. As the price of chocolate __6__ the quantity demanded __7__ other things being equal. Chocolate cannot be __8__ for nothing. Nobody would wish to __9__ if they received a zero price. Thus, __10__ is the quantity of a good sellers wish to sell at each conceivable price.