Economics Form 5 Science
Chapter 1 : Theory of Demand and Supply
Determinants or Factors influencing SupplyThe following factors tend to influence supply. Here the price of the product is assumed to remain unchanged.
- Changes in the cost of production: Profit at any given time would depend on the cost of the resources or inputs required to produce a good. An increase in the price of inputs will increase the cost of production and this will lead to a decrease in profit. This decreases the supply of the good at the ruling market price and causes the supply curve to shift to the left. Similarly, a fall in the price of inputs will increase the profitability of the good and hence an increase in supply.
- Changes in technology: Improvement or invention of new methods of production tends to lower cost of production, increase output and increase the supply of the good. This is based on the assumption that input prices remain unchanged. In some cases, low cost resulting from improved methods of production may attract new producers to enter the market and hence, there will be an increase in supply.
- Changes in weather or climatic condition: changes in weather conditions can affect the supply of agricultural products. For example, prolonged dry season in the northern parts of Cameroon is likely to decrease supply of food stuff while the raining season will increase the supply of such food stuff, i.e favorable weather will increase the supply of the good and cause the supply curve to shift to the right and vice versa
- Taxes and subsidies: A tax imposed on a good will increase the cost of production and hence decreases the supply especially for inelastic products. Conversely, the introductions of a subsidy on the supply of a good will lower cost of production and hence increase the supply of the good.
- Changes in the number of suppliers: Over long periods of time, changes in the number of suppliers in a market are a very important factor influencing changes in supply. For example, An increase in the number of suppliers in a market, other things being equal, will increase the supply of a good and vice versa
- Changes in the prices of related goods: Two goods are said to be related in supply if a change in the price of one leads to change in the quantity supplied of the other. For example, given the price of com. An increase in the price of beans would decrease the supply of com and increase the supply of beans as farmers would move their resources away from com into the production of beans. His means that com and beans are competing goods in the use of land as the main resource. A change in the price of one good in joint supply will lead to a change in the supply of the other good. For example, an increase in the price of palm oil will lead to a decrease in the supply of palm kernel. This is because they are in joint supply.
- Expectations about future prices: when suppliers expect future prices to rise, they are likely to cut down on their current supply. Consequently, there will be a decrease in supply. The reverse will be true when they expect a fall in future prices.
- The supply of seasonal agricultural product: This class of product has a perfectly inelastic supply curve. The quantity supplied at any one Period is fixed or limited only to what has been harvested or produced. An increase in price of the good cannot lead to m increase in supply especially m the short run because supply cannot be increased.
Exceptional supply curve
Despite all the reasons advanced above to justify why more will be supplied at higher prices, there are certain goods or situations in which the law is not respected. This is known as exceptions to the law of supply or exceptional supply curves. In this case, the supply curve does not slope upward from left to right.
MARKET PRICE OR EQUILIBRIUM PRICE
Definition:
In the preceding sections, we examined the demand and supply schedules for an economic good or service. It is the forces of demand and supply that interact or come together to determine the price of a good or service. When the schedules of demand and supply are brought together we find that the quantity demanded and supplied will be equal at one and only one price in the market. This price is known as the "equilibrium price" or market price."
The equilibrium or Market Price is the price at which the quantity demanded of a good is exactly equal to the quantity supplied.
Equilibrium price can be determined from the demand and supply schedules as illustrated in table below;
From the demand and supply schedule above, we see that 30, 000 CFA per bag of corn is the equilibrium price where the quantities demanded and supplied are equal at 100 Bags of corn per week.
The equilibrium price can also be determined at the point of intersection between the demand curve and the supply curve as illustrated on figure below;
The interaction between demand and supply in the figure above shows that the equilibrium price is 30, 000 CFA and the equilibrium quantity is 100 bags of corn per week. Any price below the equilibrium price is called maximum Price and above the equilibrium is called minimum price.
Effects of prices Higher or Lower Than the equilibrium price
At any price higher than the equilibrium price, the quantity supplied will be greater than the quantity demanded. This is referred to "excess supply" or "a surplus."For example looking at the table above, as the price of com increases from 30, 000 CFA to 40, 000 CFA per bag, consumers will be willing to buy off only 60 bags while supplier would be prepared to supply 140 bags. A surplus of 80 bags (140 - 60 = 80) will be available in the market. When this happens consumers will bid down prices while the suppliers will be forced to accept lower prices in order to clear off the surplus. The interaction between the consumers and the suppliers will move the price from 40, 000 CFA down towards the equilibrium price of 30, 000 CFA and the equilibrium or market price would be established at point E as seen on the diagram above.
Conversely, if the price drops from 30, 000 CFA to 10, 000 CFA, there would be a shortage in the market of 150 bags I. e. (160 - 10 = 150),
Consumers would be ready to buy more (160) bags, while suppliers would be discouraged and so would be ready to decrease the quantity supplied to 10 bags. This shortage of 150 bags would force the price up to be re-established at the equilibrium price of 30, 000 CFA I. e. At point E. Consequently, the equilibrium price will lay the free forces of demand and supply at rest. k is the scramble by buyers for few goods that raises the price.
When the forces of demand and supply are in disequilibrium situation therefore, there would always be a regulatory mechanism to bring them to equilibrium. This invisible hand that determines the equilibrium price through the free forces of demand and supply is called the price mechanism which operates without any intervention.