Supply and Price Relation: Economic Concepts - Essay Example

? Supply and Price Relation Economic Concepts Introduction Supply is the quantity of a product that a manufacturer is able and willing to sell at a specific price by keeping all supply factors constant that include price of related goods, expectations, price of input and number of suppliers etc. Price is a key determinant in the product quantity for supply. Supply is usually monitored by a specific graph drawn based on a supply schedule. The Supply schedule comprises of price listed against quantities supplied and the graph is referred to as a supply curve as shown in Figure 1. The curve signifies a law of supply implying the more the price is, the more a quantity is supplied. So if price is altered, the quantity supplied will be affected accordingly. There are a few assumptions associated with the law of supply as well. These include if there is no change in price for the factors of production or technique and related goods, the goal of the firm remains constant and manufacturers do not anticipate a change in the near future regarding price of the commodity. The relationship between price and related goods can go inverse if related goods price goes high e.g. a bar b q meal price will go high if the meat prices go high as the meal is dependent on meat but at the same time production will be decreased as the cost of production will increase. Technological advancement also helps increase production. The swifter a process is, the more the products will be manufactured. Fewer resources are required and consequently more can be produced. The number of suppliers entering the market impacts the prices by bringing it down due to competition (TR Jain, VK Ohri). Figure 1 Supply Shifts and Price Change or shift in supply refers to the phenomenon when this supply curve shifts either up towards the left or down towards the right. What causes such a change is the change in factors other than price resulting in an impact on the quantity being supplied. These factors are of the same commodity such as change in input price, number of suppliers or technology etc. this phenomenon is termed as change in the level of supply. Decrease in supply refers to the fact when supply drops due to change in the above mentioned factors. Similarly increase in supply refers to the fact when supply increases to change in those same factors. The companies are willing to produce more products in the same price when there is an increase in supply. Cheap available inputs or low cost production due to advancement in technology may contribute to these factors. Decrease in supply may be due to several reasons. One may be high cost of production because the technique is obsolete or factor prices increase. If there is a competition in market, the price of competing goods will also impact. A decrease in those prices may lead to a decrease in the product price. Similarly is number of companies in the markets decrease, this will also bring down the supply. Also, if a firm anticipates a rise in commodity price in the upcoming future, supply will be decreased. One other major factor may be due to a shift in the firm’s objectives. They might be willing to maximize their profits rather than sales (Jain and Ohri, 2010). The relationship between price and supply is held by the supply curve and stated by the law of supply. Selling chocolates will be profitable if the price of chocolates is high. Consequently chocolates will be delivered in huge quantities to meet the demand. Chocolate manufacturers will add additional resources and work on technological advancements and supplying techniques to meet the demand. Similarly if chocolate demand decreases, the production will decrease to a level to only fulfill the demand. Therefore changes in supply and demand impact market equilibrium (Mankiw, 2003). Price Elasticity and its Determinants Price elasticity of supply is a ratio between the percentage changes in the quantity supplied to the percentage change in the price. A particular supply curve of a product as a medicine or games depicts the elasticity of supply. In order to compute price elasticity, factors that affect supply are considered to be constant. E.g. suppose the price elasticity of supply for gasoline is 0.6 and the gasoline price hikes by 8 %, the amount of gasoline supplied will increase by 0.6X8. An elastic supply is defined as a product that has price elasticity greater than one. Similarly an inelastic supply is defined for a product that has price elasticity less than one. There are two more terms used to define a specific class of supply being elastic or inelastic namely perfect inelastic supply and perfect elastic supply. When price elasticity for supply is exactly zero depicting there is no change in response to change in price, the supply is termed as perfectly inelastic and the supply curve becomes perfectly vertical. Whereas when price elasticity goes infinite for a supply depicting an infinite response to a change in price is termed as perfectly elastic supply. The supply curve for a perfectly elastic supply is horizontally drawn. A high price of elasticity of supply means that price is raised in accordance to the production of the company representing a directly proportional relationship. If the company insignificantly raises its production in accordance to price hike, the phenomenon is termed as low price of elasticity of supply. The price elasticity of supply is significant to determine the response of price against changes in demand ( Taylor and Weerapana, 2011). Period of supply is impacted by the elasticity of supply. Since manufacturers have longer time to adjust to shifts in demand, elasticity of supply increases with time. There are usually three periods defined for the elasticity of supply namely, long run, short term and momentary period. The determinant of price elasticity of supply basically determines how elastic or inelastic a supply is. The factors that impact elasticity of supply is time, factor mobility, risk taking, excess capacity and unsold stocks and natural constraints. Since business is all about time, so naturally time is a critical factor in determining elasticity of supply. It is costly and challenging for manufacturers to produce and deliver resources in crunch mode. In the long run period supply is more likely to be elastic than the short run period. If a firm has unused resources, and the pool of equipment along with labor is available, the company may utilize these resources for a short period to considerable increase supply. Another scenario can be in which products are present in a huge quantity that are not sold. Increasing supply will be easy and efficient in such a scenario. This results in a more elastic supply when there is a greater capacity for excess resources or goods. Elasticity of supply is also affected by the reusability of the resources of production. The more the ease is provided to move one resource of production to another increasing mobility, the more the elasticity is provided. The price factor of the resources might turn out costly but the change that upraised its value helps provide elasticity. Products manufactured or delivered from natural processes take time so the decrease elasticity. The core of an entrepreneur is in taking risks. The more an entrepreneur is willing to take a risk, the more elastic the supply becomes. Conclusion The concept of elasticity throws light on the effect of price change on quantity supplied. It is used to predict if revenue increases or decreases if prices are raised or bought down and to check the impact of it on the quantity supplied. References JAIN, T. R., OHRI, V. K., & MAJHI, B. D. (2010). Principles Of Macroeconomics. FK Publications. MANKIW, N. G. (2003). Principles of economics. Princeton, N.J., Recording for the Blind & Dyslexic. TAYLOR, J. B., & WEERAPANA, A. (2011). Principles of economics. South-Western Pub. Read More