The law of supply in economics is a microeconomic law. It lies in the fact that, ceteris paribus, as the price of a service or product increases, their number in the market will increase, and vice versa. This means that manufacturers are ready to offer more products for sale, increasing production, as a way to increase profits.
History reference
The law of supply in the economy is fundamental and fundamental. This theory assumes market competition in the capitalist system. She describes how supply and demand interact. The British philosopher John Locke was the first to notice this connection. As a rule, if the change in supply increases and demand is low, the corresponding price will also be low, and vice versa. Finally, this theory is used in the famous "Study of the nature and causes of the wealth of the Nations" by Adam Smith. It was published in the UK in 1776.
Offer, offer factors
The law of supply is closely related to the demand for a product or service at a specific price. This is a fundamental economic concept. It describes the total volume of a product that consumers can purchase. The offer provided by manufacturers will grow along with a rise in price, as all firms strive for maximum profit. It can relate both to a certain price category, and to a whole range of value.
Graphical representation
A graphical representation of the supply curve data was first used in the 1870s in English texts. Then it was popularized in the founding textbook "Principles of Economics" by Alfred Marshall in 1890.
For a long time, it was discussed why Britain was the first country to adopt, use and publish a theory of supply and demand. The industrial revolution, the emergence of the British economic center, which included heavy production, technological innovation and a huge amount of labor were the reason.
Related terms and concepts
Related terms and concepts in today's context include supply chain allocation and money supply. The financial flow refers specifically to the entire stock of foreign currency and liquid assets in the country. It is necessary to analyze and control the laws of a market economy. For this, policies and rules are formulated based on fluctuations in the money supply. This happens through interest rate controls and other similar measures.
Official data on the country's money supply should be accurately recorded and periodically published. The European sovereign debt crisis, which began in 2007, is a good example of the role of a country's financial flow and global economic impact.
Another important concept associated with supply in the modern world is the allocation of global supply chains. It aims at effectively linking all the principles of the transaction, including the buyer, seller and financial institution. This reduces overall costs and speeds up the business process. This procedure is often made possible by the technology platform and affects industries such as the automotive and retail sectors.
Supply and demand
Supply and demand trends form the basis of a modern economy. Each specific product or service will have its own indicators. They are based on price, utility and personal preference. If people demand a product and are willing to pay more for it, then there will be a change in its entry into the market. As it increases, the cost will fall at the same level of demand. Ideally, markets will reach equilibrium when supply equals demand (without excess and deficit). At the same time, consumer utility and producer profit will be maximized.
Supply of goods and services
The offer price is what the manufacturer receives for the sale of one unit of service or product. Its increase almost always leads to an increase in supplies. Falling, on the contrary, will lead to their reduction. This means that a higher cost leads to more sales, and a lower one leads to less. This positive interaction is called the law of supply in economics. He assumes that all other variables remain constant.
Delivery and quantity delivered
It is necessary to understand these concepts. In economic terminology, the supply does not coincide with the quantity of goods. When specialists refer to it, they mean the relationship between the price range and stocks of products. It can be illustrated using a supply curve or supply schedule. In this case, only a certain point is meant. Simply put, the proposal refers to the curve, and the delivered quantity - to its specific point.
Product Replacement
Substitute goods in consumption theory are a product or service that the consumer considers the same or similar to others. In formal language, X and Y are substitutes if demand for X increases with increasing price Y, or if there is a positive cross elasticity of demand.
Replacement Terms
There should be a certain relationship between identical products. They can be close, like one brand of coffee with another. Or a little further apart, for example, coffee and tea. When studying the relationship, you can see that as the price of a product rises, the demand for its substitutes increases. If, for example, coffee becomes more expensive, tea is sold much better. This is because consumers are switching to it to maintain their budgets. The same principle works in the case of the opposite situation.
Replacement Types
Classifying a product or service as a substitute is not always easy. There are various degrees of it. It may be perfect or imperfect. It depends on whether the replacement is fully or partially satisfactory to the consumer.
The ideal option is a product or service that can be used in the same way as those that are used instead. At the same time, utility should be largely identical. A bicycle and a car are far from ideal substitutes, but they are similar in that people use them to get from point A to point B, so there is some measurable connection in the demand graph.
Say's Law
This market law was developed by French economist and journalist Jean-Baptiste Say in 1803. He contradicted the view that money is a source of wealth. In fact, it is production, not capital. In other words, supply creates its demand. Say's law supports the view that the government should not interfere in the free market and must accept the principle of non-interference in the economy. It still operates in modern neoclassical economic models that assume that all markets are clear.
The Great Depression proved that countries can face serious crises. Market forces cannot fix them. This is because there is an abundance of production capacity, but not enough demand. British economist John Maynard Keynes challenged Say's law in his founding book, The General Theory of Employment, Interest, and Money.
Keynesian economist Paul Krugman emphasizes the role of capital in denying Say's law. He believes that the funds that are stored are not spent on products. From time to time, households and enterprises collectively seek to increase net savings and thereby reduce debt. This requires earning more than wasted, which is contrary to Say's law.
Inflation
Inflation expectations are consumer expectations regarding future inflation. They affect not only aggregate, but also market demand. Buyers seek to purchase goods at the lowest possible cost. If they expect a rise in price in the future, then they increase their purchases in the present.
If buyers expect price reductions, then they are lowering their needs in the present. Thus, a strong bond arises. It is formed between price and inflation expectations and aggregate market needs. If people expect higher inflation in the future, then they are increasing consumer spending now and vice versa. In each case, housewives tend to buy goods at the lowest possible prices.
Influence on inflation
Inflation expectations are influenced by the following factors:
- The current rate of inflation. They are the greatest guide to future expectations.
- Past trends. For example, a bad history of inflation is likely to make people more pessimistic.
- General economic prospects. For example, growth prospects and unemployment. However, it is not clear that people make the same links as specialists. For example, if there is the prospect of a decline in unemployment, we expect inflation to be lower. Some people may simply equate the decline to bad news, such as price increases.
- Wage growth.
- Monetary policy. If people feel that the government is ready to expand the economy and risk inflation, then they can begin to expect more inflation.
Practical examples
The law of supply in the economy generalizes the effect of price changes on producer behavior. For example, a business will make more gaming systems if its benefits increase, and vice versa. A company can supply 1 million systems if the price is $ 200 each. If the cost increases to 300 dollars, it can supply 1.5 million systems.
To further illustrate this concept, it is worth considering how gas prices work. When gasoline rises in price, it is recommended to take several actions to change the offer in order to profit firms:
- expand oil exploration;
- get more oil;
- invest more in pipelines and tankers for transporting raw materials to plants where it can be processed into gasoline;
- build new oil rigs;
- purchase additional pipelines and trucks for the delivery of gasoline to gas stations;
- open several gas stations or save existing gas stations, making them round-the-clock.
Economic equilibrium
The equilibrium point in the economy is a state in which some forces, such as supply and demand, are balanced and will not change without external influences. In the standard textbook model of perfect competition, it arises when the quantity demanded and delivered is equal. Market equilibrium in this case means the condition under which price is established through competition. Moreover, the volume of goods or services requested by customers is equal to the volume of production.
This price is often called competitive or market. As a rule, it will not change if demand or supply does not change. The quantity supplied is also called competitive or market. However, such a concept in the economy is applicable to imperfectly competitive markets. In this case, it takes the form of a Nash equilibrium.