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PERFECT COMPETITION AND SHORT-RUN SUPPLY CURVE: A perfectly competitive firm's supply curve is that portion of its' marginal cost curve that lies above the minimum of the average variable cost curve. A perfectly competitive firm maximizes profit by producing the quantity of output that equates price and marginal cost. As such, the firm moves along it's marginal cost curve in response to alternative prices. Because the marginal cost curve is positively sloped due to the law of diminishing marginal returns, the firm's supply curve is also positively sloped.
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SUPPLY: The willingness and ability to sell a range of quantities of a good at a range of prices, during a given time period. Supply is one half of the market exchange process--the other is demand. This supply side of the market draws inspiration from the limited resources dimension of the scarcity problem. Supply is a fundamental aspect of market exchanges and economic activity. Supply is based on the ownership and control of the scarce resources (labor, capital, land, and entrepreneurship) which are use to produce the goods and services that satisfy wants and needs.A Closer LookThree aspects of supply are worthy of further consideration:- Willingness and Ability: Supply requires both willingness and ability. While supply can be constrained by the physical ability to sell a good, production cost is often the primary influence on ability. A seller must receive enough revenue to compensate for the cost of production, or there is NO supply. Nelly Copplehelmer, for example, would like to grow asparagus on her farm. Unfortunately, the cost of irrigating, fertilizing, and maintaining an asparagus crop is too high. She does NOT receive enough revenue to sell asparagus. As such, she does NOT supply asparagus because she has NO ability to sell.
A seller also must have a WILLINGNESS to sell a good. While most suppliers have little or no personal involvement in a product, some (potential) suppliers ARE affected by willingness. Phil Amberton, for example, runs a highly profitable farming operation, with low cost and an excellent distribution network. He could easily generate enough revenue to cover the cost of producing asparagus. However, he was involved in a traumatic asparagus "incident" as a child and refuses to grow asparagus, no matter how profitable it might be. As such, he has NO supply of asparagus because he has NO willingness to sell.
- Range of Prices and Quantities: Supply is a range of prices and quantities. It includes not just the quantity sold at the current price, but any and all quantities that would be sold at other prices--higher and lower. MegaMart Discount Super Center, for example, is NOT willing and able to sell asparagus if the price is 25 cents a pound. However, if the price is to 50 cents a pound, it is quite willing and able to sell asparagus.
Practicing the fine art of economic analysis--market style--involves a lot of "What if?" questions, such as: "What would happen in the asparagus market if the price is $1 a pound, or 25 cents a pound, or $100 a pound, or...?" Limiting analysis ONLY to the current price, ignores a vast range of alternatives that might occur. And this eliminates a lot, in fact almost all, of the really important analyses of markets.
- Given Time Period: Supply is identified for a specified time period. The analysis of asparagus supply needs information on the time period. Is the supply for an hour, a day, a week, a month, a year, or a decade? Presumably, people sell a larger quantity of asparagus, at a given price, over a decade than over a week. When economists work with supply they need a specific time period. Like adding apples and oranges, it makes no sense to combine MegaMart's daily asparagus supply with Discount Grocer's annual asparagus supply.
Price and QuantitySupply is a range of prices and quantities. The price part of this relation is termed supply price and the quantity part is termed quantity supplied.- Supply Price: This is the minimum price that sellers are willing and able to accept for a given quantity of a good. They would be willing to accept more than this price, but not less. Supply price is based on the opportunity cost of producing the good.
- Quantity Supplied: This is the specific amount of a good that sellers are willing and able to sell at a given supply price. The quantity supplied is the maximum amount of the good that sellers are willing and able to sell at the given price.
Supply price and quantity supplied come together as matched pairs. One supply price, one quantity supplied. Supply is then the combination of these matched price-quantity pairs.The Law of SupplyThe specific supply relation between price and quantity is termed the law of supply. The law of supply is the direct relation between supply price and quantity supplied. If, in other words, the supply price increases, then the quantity supplied increases. The law of supply, while important to the study of markets and economics, has a number of important exceptions and is not as unwavering as other laws (like the law of demand).The law of supply can be attributed to two even more basic laws. - Law of Increasing Opportunity Cost: This is a principle derived from the production possibilities analysis stating that the value of foregone production increases as the quantity of a good produced increases. As such, to produce more of a good, sellers need to receive a higher price to cover the increasing opportunity cost.
- Law of Diminishing Marginal Returns: This is a principle of short-run production stating that as more of a variable input is added to a fixed input, then the marginal product of the variable input decreases. The decrease in this marginal product then causes an increase in the marginal cost of production. As such, to produce more of a good, sellers need to receive a higher price to cover the increasing marginal cost.
A Supply CurveA Supply Curve | | The supply relation between supply price and quantity supplied is commonly represented by a supply curve. A supply curve is nothing more than a graphical representation of the law of supply. The supply curve presented in this exhibit shows the relation between the supply price, measured on the vertical axis, and quantity supplied measured on the horizontal axis. The positive slope of the supply curve graphically illustrates the direct law of supply relation between supply price and quantity supplied. As the supply price increases from 5 to 50, the quantity supplied increases from 0 to 900. Sellers are willing and able to sell more at higher prices. Five DeterminantsWhile supply price is the most important factor that affects the sale of a good, it is not the only factor. Five other factors, termed supply determinants, are also important. These determinants cause a change in the supply of a good, that is, more or less of the good is sold at existing prices.- Resource Prices: The prices paid for the use of resources in the production process affects production cost and the ability to sell a good. If resource prices increase, then sellers are able to sell less of a good.
- Technology: The information and techniques known about the production process has a direct impact on the ability to sell a good. If sellers have an advance in production technology, then they are able to sell more of a good.
- Prices of Other Goods: The supply of one good is interrelated with the production of other goods, and the prices of those goods. Some goods are substitutes, produced with the same resources in an either or fashion, others are complements, produced jointly with the same resources. If the price of a substitute good increases, then sellers switch to the production of that good and sell less of this good. If the price of a complement good increases, then sellers produce more of both goods.
- Sellers' Expectations: Sellers decide how much to sell based on a comparison of current and expected future prices. If sellers expect a higher price in the future, then they sell less of a good today.
- Number of Sellers: The total number of sellers participating in a market affects how much of a good is supplied. If there is an increase in the number of sellers, then there is a greater supply of the good.
Two ChangesThe study of supply highlights two related, but distinct, changes. To understand these changes, first considered two related, but distinct, notions of supply.- Quantity Supplied: This is the specific amount that sellers are willing and able to sell at a specific price. It is indicated as a single point on the supply curve.
- Supply: This, in contrast, is the entire set of price-quantity pairs that reflect sellers willingness and ability to sell a good. It is the entire supply curve.
Two interrelated changes are implied directly from the two notions.- A Change in Quantity Supplied: This is a change in the specific amount of the good that sellers are willing and able to sell. It is caused by a change in the supply price and is indicated by a movement along the supply curve from one point to another.
- A Change in Supply: This a change in the overall supply relation, a change in all price-quantity pairs. It is caused by a change in one of the five supply determinants and is indicated by a shift of the supply curve.
The difference between a change in supply and a change in quantity supplied is essential for understanding how the market adjusts to external shocks.
Recommended Citation:SUPPLY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: October 11, 2024]. Check Out These Related Terms... | | | | | | | | | | | Or For A Little Background... | | | | | | | | | | | | | And For Further Study... | | | | | | | | | | | | | | | |
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