Competitive Markets - Supply

September 20, 2021 09:06 AM
Study time
Oct 20, 2021
Oct 22, 2021

Supply quantity of a good or service that the producer is willing and able to produce at every given price

Reasoning for the law of supply

3 main reasons why supply curves are drawn as sloping upwards from left to right

Profit motive

If the market price rises following an increase in demand, it becomes more profitable for businesses to increase their output

Production and costs:

When output expands, a firm’s production costs tend to rise, therefore a higher price is needed to cover these extra costs of production. This may be due to the effects of diminishing returns as more actor inputs are added to production.

New entrants coming into the market:

Higher prices may create an incentive for other businesses to enter a market leading to sn increase in total supply.

The determinants of supply in a market

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Price determinant:
The price of a good
Non price determinant:
Costs of the factors of productions
Price of relate products: joint and competitive supply
State of technology, Firms’ expectations, Government intervention

Cost of production

If higher wages are given to workers, costs of labour will rise, costs of FoP will increase
firms less able to supply same quantity at every given price level
-> supply would therefore shift inwards, to the left

Competitive supply

Producers usually have a choice of what they produce, unless of course they produce a very niche product. If a suppler can produce skateboards, we can assume that it is fairly easy to switch to producing snowboards.

Joint supply

When some goods are created, this naturally creates “by-produces” of these goods e.g. beef and leather (more demand for cows, more cows killed to provide beef, so more supply of leather)
Competitive supply: when a producer can switch between making an option of 2 or more goods
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Joint supply: when a good sees a demand rise, the good that is a “by-product” sees a rise in supply
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Government intervention

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supply + demand = creation of market

Market equilibrium (Markt im Gleichgewicht)

Sep 24, 2021
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Market equilibrium is where demand=supply
The price of any product is determined by demand and supply.
This is where the market will clear, both sides are satisfied.
The price that the customer is willing and able to pay for the good is equal to the price the producer is willing to and able to sell it at.

Disequilibrium (Mangel an Gleichgewicht)

Sep 24, 2021
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If the price is set too low, then more will be demanded than is being supplied.
→ will lead to a shortage.
When demand is greater than supply, prices will rise, suppliers will want to maximize profits.
Surplus occur when prices are to high
Suppliers reduce prices to get rid of surplus.
When supply is greater than demand, prices will fall.

Competitive markets (free market theory)

Everything to do with supply and demand theory is based on assumptions.
There are a large number of buyers and large number of sellers
Demand and supply are independent of eachother
Ceteris paribus
No single consumer or producer can influence the market price in the long run
Consumers act rationally
Producers have to compete to sell goods at the lowest possible price in order to make as much profit as possible
Markets are controlled by the “invisible hand” through the “price mechanism”


Supply and demand theory

If a non-price determinant of demand were to shift the demand curve outwards, we would see a change in the equilibrium price and quantity.
Similarly, if a non-price determinant of supply were to sift the supply curve, we would see a change in the equilibrium price and quantity.

The impact of changes in demand and supply on equilibrium

A change in price will lead to a movement along the supply or demand curve
A change in any other factor will lead to a shift in the demand or supply curve
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Price mechanism

The price mechanism looks at why the price changes due to a shift in either demand or supply.
There are 3 functions: signalling, incentives, rationing
The signaling function occurs because it tells producers that they either need to raise or lower quantity due to a shift in demand or supply.
The incentive function occurs because a producer will need to have a reason (that benefits them) as to why they will change the quantity supplied given a shift in demand or supply.
The rationing function occurs because a price change will allow the quantity supplied to either fall or rise depending on the shift in demand or supply.


Productive Efficiency is where resources are produced at the lowest possible cost, and therefore resources are being produced efficiently. (Lowest cost on production curve) - no waste and all resources are being used
Allocative Efficiency is where goods and services are distributed at a level where the cost of production (price companies are willing to produce) equals the demand from consumers (Price customers are willing to pay).