Topic 4.1 - Individuals, firms, markets and market failure
Snapshot of the AQA syllabus topic area we’ll be covering in this post.
DETERMINANTS OF THE SUPPLY OF GOODS AND SERVICES: PRICE DETERMINATION IN COMPETITIVE MARKETS
AQA students must understand the following content [taken from the syllabus]
A supply curve shows the relationship between price and quantity supplied.
Understand that higher prices imply higher profits and that this will provide the incentive to expand production.
The causes of shifts in the supply curve.
INFORMATION YOU NEED TO KNOW
Introduction:
The concept of supply is crucial to understanding the availability and production of products and services in the study of economics. The numerous elements that affect the volume of goods and services producers are willing and able to provide in the market are known as the supply determinants. By examining the relationship between price and amount supplied, the incentive for production expansion, and the reasons behind fluctuations in the supply curve, this article seeks to shed light on these drivers.
The Supply Curve and Price-Quantity Relationship:
The supply curve, which depicts the relationship between a product's price and the quantity supplied by producers, is an essential tool in supply analysis. The rising slope of the supply curve indicates that when prices rise, so does the amount supplied. In contrast, the amount offered decreases as prices rise. This positive correlation between price and amount supplied results from producers increasing their output when prices rise due to the profit motive.
Profit Incentive and Expansion of Production:
The desire for profit is a key factor in supply management. Higher prices result in greater earnings for producers, providing an incentive for them to increase output and supply the market with more goods and services. When manufacturers expect more profits, they devote more resources, spend more on technology, and hire more people to create more. This increase in production causes the supply curve to shift to the right, showing a higher supply at each price level.
Causes of Shifts in the Supply Curve:
The willingness as well as ability of producers to provide goods and services can affect how the supply curve shifts. Some important factors include:
1. Input Prices: Costs of inputs like labour, energy, and raw materials have a big impact on how much something costs to produce. As a result of declining profitability due to rising input costs, producers provide less at each price level, which causes the supply curve to shift to the left.
2. Technological Advancements: Technological advancements can boost supplies, lower costs, and improve production efficiency. The supply curve shifts to the right as a result of producers being able to produce more with the same quantity of inputs thanks to technological developments.
3. Government Regulations and Taxes: Regulations, taxes, and policies may have an impact on manufacturing costs and, as a result, the availability of goods and services. For instance, increasing taxes or regulatory constraints might increase production costs and cause a drop in supply.
4. Expectations: The future market conditions that producers anticipate can have an impact on their supply decisions. The supply curve will shift to the left if producers reduce current production in anticipation of future price increases so they can profit from larger profits later.
5. Number of Producers: The amount of businesses or producers in a market can affect supply. When there are more producers, there is often a bigger quantity supplied, which causes the supply curve to shift to the right.
Conclusion:
Understanding how the market works and the availability of goods and services requires an understanding of the factors that determine supply. The profit incentive serves as a driving force for increasing output, whereas the supply curve shows the link between price and amount delivered. Shifts in the supply curve are influenced by a range of variables, including input pricing, technical developments, governmental regulations, expectations, and the number of producers. Policymakers, companies, and consumers can learn more about the dynamics affecting the supply side of the economy by analysing these variables and making informed decisions based on them.
SUPPORTING DIAGRAMS
