What Causes Change of Supply and How Supply Can Determine Prices - Essay Example

Define supply and explain what causes change (shifts) of supply and how supply can determine prices Contents Define supply and explain what causes change (shifts) of supply and how supply can determine prices 1 Contents 2 Supply 3 Shifts of supply 4 Tremendous rise of price 4 Recession 4 Price of inputs 4 Determination of price with regards to supply 5 Price elasticity of supply and its determinants 6 Price Elasticity of supply 6 Determinants of Supply 7 When supply is: 8 Price Elastic 8 Price Inelastic 8 Price Unit Elastic 9 Reference 10 Supply The concept of supply highlights the concept of making varying amounts of quantities, of homogeneous materials available to the consumers at the marketplace, where other factors of micro and macroeconomic issues are in play (Jain and Okhri, 2009, p. 171). It is important to state that during the course of making the various amounts of homogeneous goods available in the marketplace, there will be significant effects with regards to the prices of the commodities. The reason being the existence of a variety of suppliers and manufacturers, who are supplying homogenous or heterogeneous kinds of goods has the power to act as substitutes. These players will try to compete with each other to provide significant amount of value to the customers and thereby generating competitive advantage. This graph displays the supply and demand curve. The point of intersection represents the state of equilibrium in the market. Shifts of supply It is important to note that the state of equilibrium attained by the intersection of demand and supply curve keeps on moving and is not constant in nature. As a matter of fact, it can be said that there can be various factors which may lead to shifts in supply curve. Tremendous rise of price Abrupt rise of prices of certain commodities, which has happened due to the rise of inflation rate in recent times, can at times lead to significant changes in supply. Due to the significant rise in prices of commodities, the general masses become incapable to purchase the same at high rates. This results in building up of inventory. As a precautionary measure to cool down inflation and maintain a significant amount of balance in the market, the suppliers and manufacturers focus on lowering down the supply rate of the commodities (Mankiw, 1998, p. 80). Recession The effect of recession can also induce significant amount of supply shift. In times of recession, for the purpose of boosting the economy, the rate of interest is generally reduced. This automatically contributes to a significant rise in the institutional lending as well as boosting of production of various commodities in the economy. Hence, recession can also initiate significant shifts of supply of commodities in the economy of a particular region (Mankiw, 2011, p. 745). Price of inputs It is observed that the price of multiple input variables and resources can bring about a significant influence in the supply of a particular commodity. It can be said that in the case of rising input prices, there might be immense pressure on the manufacturer to cut down on various costs. This might contribute to a lower amount of production by the manufacturer. Hence, this can automatically contribute to a movement in commodity supply in the market (Taylor and Weerapana, 2011, p. 57). Determination of price with regards to supply In this scenario with an increase or a forward shift in supply, the price points of a particular commodity are supposed to decrease. It can be said that in normal cases, the forward shift in supply happens because of oversupply of the commodities as well as presence of new competitors in the market. Also, in a bid to stay competitive, the firms focus on providing more value to the customer and hence more quantity of a commodity is available at a lower price point. This particular factor is represented below in the form of a diagram: In case of a shortage of supply, it can be automatically said that the availability of commodity in the market is bound to reduce. This creates a tremendous amount of pressure on the suppliers and manufactures of the commodity. As a preventive measure, they will automatically focus on raising the prices of the particular commodity available in the market. This step will significantly help in the contraction of demand of the product in the market. Also, it can be said that with the significant rise in prices, the amount of quantity of the commodity that is being provided to the customers is also reduced in certain cases. The graph below represents the scenario that happens in the case of fall in supply: Price elasticity of supply and its determinants Price Elasticity of supply While discussing the price elasticity of supply, it can be said that the various other economic variables that can have significant amount of impact on supply are assumed to be constant (Hall and Lieberman, 2009, p. 139). Determinants of Supply There are certain factors that help in a great way in the process of determining the price elasticity of supply. Presence of substitute products It can be said that the availability and presence of substitute products in the market, will have a considerable impact in determining the supply factor of a particular commodity in the market. It can be said that with the availability of substitute products in the market, the demand for the main commodity will achieve a significant amount of downfall, thereby impacting the supply as well as price elasticity of the product. Difference between necessities and luxuries There is a significant amount of correlation between the economic trends of luxury products and products of necessity. In most cases the luxury products tend to have an elastic nature of a demand. However, it can be said that the relation between luxury products and their demands are dependent and varies with the change in category and demography of people. For people who have a standard level of income, it can be said that the luxury products hold an elastic kind of demand, while for people with significantly high level of income, the luxury products tend to have an inelastic kind of demand. However, in case of necessity items that are related to survival and basic needs, it will be a common trend for all consumers, irrespective of their levels of income, to focus on having the right product or service. Hence, it can be said that the necessity products are bound to witness an inelastic kind of a demand (Mankiw, 2011, p. 91). When supply is: As per the laws of demand and supply it is quite natural that with the rise in prices for a normal good, the demand for it is bound to decrease, while on the other hand, a significant fall in prices will automatically contribute to the rise in demand for a commodity, product or service. However, there can be three different kinds of scenarios that might emerge as a result of this: Price Elastic It can be said that the demand for a particular product is considered elastic in nature if the value of elasticity is greater than 1. In this particular scenario, the rate of change of price results in a tremendous rise in the demand of the quantity. Price Inelastic In case of inelasticity of price, it can be said that the value of elasticity is less than 1. Here the significant rise in price leads to a considerable amount of fall in quantity a commodity that is being demanded by the consumers in the market place. Price Unit Elastic In case of unit price elasticity, it can be said that the unit change in price will bring in unit change in quantity demanded. It is highly relevant to state in this particular scenario that the value of elasticity is exactly equal to 1 (Mankiw, 2011, p. 93). Reference Jain, T.R. and Okhri, V.K., 2009. Introductory Microeconomics and Macroeconomics. New Delhi: Prince Print Process. Mankiw, N.G., 1998. Principles of Microeconomics, vol 1. United States of America: Harcourt Brace College Publishers Mankiw, N.G., 2011. Principles of Microeconomics. Sixth Ed. USA: South Western Cengage Learning. Taylor, J.B. and Weerapana, A., 2011. Principles of Microeconomics. Seventh Edition. USA: South Western Cengage Learning. Hall, R.E. and Lieberman, M., 2009. Microeconomics: Principles and applications.5E. USA: South Western Cengage Learning. Read More