An Increase of Suppliers Results and a Shift of the Supply Curve - Assignment Example

An Increase of Suppliers Results and a Shift of the Supply Curve Introduction Microeconomics is the evaluation of small economic components of the economy, including industries, people, households, and firms at an aggregate level (Marshall, 1998). Microeconomics examines supply, production, demand, profit maximization, cost minimization, market structures, and pricing (Dunne, Bradford, & Mark, 2009). According to a view shared by Varian (2009), microeconomics studies the manner in which decisions and behavior impact on the supply and demand of products and services. Eaton, Eaton, and Douglas (2012) assert that this in turn determines prices, which establishes the quantity demanded and quantity supplied of the services and products. Therefore, drawing on a variety of sources the paper will discuss how a decrease in price caused by an increase in the number of supplier shifts the supply curve to the right based on an article on oil prices reduction. Discussion Supply is the amount of goods manufacturers or suppliers are willing to sell at a certain price (Colander, 2008). The law of supply says that the higher the price of a product, the more the quantity suppliers or firms will be willing to produce and sell (Hall & Lieberman, 2012). Supply is usually plotted as a supply curve demonstrating the link between price and the amount of products producers are ready to bring to the market and sell. As a result, it slopes from left to right. There are various factors that affect supply, First is the technology used to produce the good. If a firm uses advanced technologies to produce the product, more products will be manufactured increasing supply. Secondly is the price of the product. There is a proportional relationship between price and supply. If the price of a commodity increases, it will result in a proportionate increase in the quantities supplied. Third is the number of firms. When the number of manufacturers increases, there are more suppliers in the market leading to a drop in the price of the commodities supplied. Next is the price of alternative goods (Varian, 2009). When the price of an alternative good rises, the manufacturers find it profitable increasing production. Fifth are the future expectations of the producers. When the producers are looking forward to an increase in price in the future, they can increase their production so as to earn more profits in the future (Perloff, 2007). Consequently, the supply increases. Sixth is the price of inputs also affect supply. Goodwin, Nelson, Ackerman, and Weissskopf (2009) observe that an increase in the price of land, labor, and raw materials results in less products being supplied to the market. Lastly, government policies and laws have a considerable impact on the supply of products. For example, low taxes lead to an increase in supply because the producers can bring more products to the market. When more suppliers enter a market, the price of the good usually drops. According to the law of supply there is a direct relationship between quantity and price (Dunne, Bradford, & Mark, 2009). This means that the response of the quantities is in a similar direction as the change in price. In other words, the law of supply is a positive relationship between price and product supply. The article Oil Prices: What’s Behind the Drop? Simple Economics by Krauss talks about the factors that have resulted in the recent drop in oil prices in the market today. As cited by Samuelson (2010), a market is defined as one particular product as well as the economic interactions of people who own, produce, trade and consume the product. The market under consideration involves a homogenous product, which is oil. In the oil economy, legal titles and contract terms are very important, in addition to the exact rights conveyed with the product. Over and over again, the title to the delivery of oil will describe particular terms, like time of payment, oil pricing based on a certain index, and an agreement to purchase additional oil. This makes oil, a homogenous product, to be differentiated. Oil prices have often been associated with ever increasing prices. This has resulted in oil companies earning record profits. However, the recent drop in oil prices from $54 to $49 a barrel has led to some firms reducing investments in production and exploration (Oil-Price.Net, 2015). The oil producing nations and industries are in a perfectly competitive market. This implies that the companies take prices as given and select the levels of inputs and outputs that increase profits. Therefore, according to Krauss (2015), the reason why the oil prices are reducing so fast is that there is increased production from countries such as Nigeria, Algeria, America, Canada, and Russia. Besides that, initially, the fuel prices were very high forcing motorists to purchase more fuel-efficient cars. As a result, the demand for fuel reduced. With regard to the oil producing and exporting countries, their prices of crude oil benchmark have dropped by approximately 40% leading to an oversupply of oil. Saudi Arabia, the major oil producer in the world, has been pushing for a further reduction of oil prices. However, the International Monetary Fund approximates a drop of the Saudi revenues by about $300 billion this year due to increased oil producers in the market. Kraus (2015) further points out that there have been various conspiracy theories regarding the drop in oil prices. The article concludes by asserting that the oil prices will not recover as they were initially because oil production is increasing on a global scale. From the article, it can be seen how an increase in the number of firms have affected the price of oil, which in turn has impacted on the supply of oil. An increase in price leads to an increase of supply. Initially, the prices of oil were very high. When the oil prices were high the oil suppliers had the incentive to supply more because they got extra income from selling the product. This made them to supply more of the commodity to the market. However, due to an increase in the number of oil producers globally, more was produced and there was a surplus in the market. Countries such as Angola, Canada, America, Mexico, and Russia that were initially importing oil are now producing oil are with the established oil producers like Saudi Arabia increasing their production rate. This means that there is more oil in the same market. This forces producers to reduce their prices so that the customers can purchase. As cited by Goodwin et al. (2009), falling prices cause an expansion of demand. As price changes, there is a movement along the supply curve. To that effect, the reduction in price caused a higher amount of oil to be supplied. The consumers will purchase more of the product at low prices. In this perspective, any change in an underlying determinant of supply such as a price will shift the supply curve. Every consumer has a certain income that they are willing to spend. Krauss (2015) observes that most countries are manufacturing energy efficient automobiles. Therefore, this implies that by customers buying the fuel efficient motor vehicles the fuel demand reduces since the vehicles consume less fuel. As a consequence, the producers are left with more of the product. In the long-run, this leads to an increase in supply and prices reduce. As cited by Mankiw (2011), if the price of a product changes holding other factors constant, the supplier will regulate the quantity of goods supplied to the extent that is the consumers are willing to accept the prevailing price. It can be shown that the oil suppliers have adjusted the prices in order to be accepted by the consumers. If the supply curve shifts to the right, it means that there is increased supply and more quantities would be demanded because the consumers can afford the product due lower prices. As cited by Krauss (2015), the reduction of the oil prices means that most consumers can buy natural gas and diesel that take a big amount of their expenditure. The falling oil prices cause an expansion of demand. The consumers will purchase more of the product at low prices (Samuelson, 2010). When the number of producers increased, more oil was available in the market leading to a drop in the oil prices. Conclusion In summary, the factors that affect supply include, number of firms, technology, the price of the product, price of related products, producer’s future expectations, government regulations, and price of inputs. As more producers enter the market, more products are supplied to the market. This forces the supplier to reduce the prices in order to sell their products. A reduction in price impacts on the supply and quantities demanded. A drop in prices increases the quantities demanded by the consumers. When prices are reduced more quantities are demanded since the consumers purchase more at lower prices. As a result, the supply curve shifts to the right. References Colander, D. (2008). Microeconomics. New York: McGraw-Hill. Dunne, T., Bradford, J., & Mark, R. (2009). Producer dynamics: New Evidence from Micro Data. University of Chicago Press Eaton, C., Eaton, F., & Douglas, A. (2012). Microeconomics. Montreal: Prentice Hall. Goodwin, N, Nelson, J., Ackerman, F., & Weissskopf, T. (2009). Microeconomics in context, New York: Sharpe. Hall, R., & Lieberman, M. (2012). Microeconomics: Principles and applications. New York: Cengage Learning. Krauss, C. (January 12, 2016). Oil prices: What’s behind the drop? Simple economics, Accessed March 18, 2015, from http://www.nytimes.com/2015/01/13/business/energy-environment/oil-prices.html?_r=0 Mankiw, N. (2011). Principles of microeconomics. New York: Cengage Learning. Marshall, A. 1998. Principles of economics. London: Macmillan. Oil-Price.Net. (2015, March 17). Crude Oil and Commodity Prices, Retrieved March 17, 2015, from http://www.oil-price.net/ Perloff, M. (2007). Microeconomics: Theory and applications with calculus. London: Pearson – Addison Wesley. Samuelson, P. (2010). Foundations of economic analysis, New York: John Wiley & Sons. Varian, R. (2009). Intermediate microeconomics: A modern approach. New York: W. W. Norton & Company. Read More