market supply

Introduction

Let us start with understanding what market supply is. The aggregate of individual supply curves inside a market classified as perfectly competitive is referred to as market supply. A supply curve graph depicts a supplier’s positive relationship between the price and quantity of an item or service. As a result, the supply curve slopes upward. The aggregate of individual supply curves within a market is called market supply.

Due to the special characteristics of perfect competition, the supply curve can only be ascribed to a portrayal of a completely competitive market: businesses are price takers, and no single firm’s activities may impact the market price and ease of departure and entry.

The market supply curve is calculated by adding all market participants’ quantities at a given price (suppliers). It displays the many price-to-quantity options accessible to the product or service’s customers.

Market Supply Curve 

Now that we know what market supply is, let us move ahead. Have you ever strolled through your area and thought to yourself, “Why is there a convenience store and a pizza parlour on every corner?” With all of this competition, how can they make a profit?’ 

Companies can calculate their supply curve and the market supply curve for the area to determine the price that customers are willing to pay for a product or service. Some companies recognise that there are enough consumers to go around. Let us explore how they know this.

The supply curves of individual businesses are combined to generate a market supply curve. A crucial principle for market supply curves is that the market must be completely competitive. It indicates that the market has a wide number of participants (companies that produce the same product) and that there is no dominating player with the ability to control pricing.

The market supply curve is an upward-sloping curve that shows a positive link between price and quantity provided.

By definition, conceiving a supply curve necessitates the business is a perfect competitor, i.e., not influencing the market price. If a business has market power, its choice about how much production to offer to the market affects the market price; the firm is not “fronted with” any price, and the question is irrelevant.

The characteristics of a competitive market indicate that the pricing is determined outside of any company. As a result, market production is a sliding scale based on price. As the price rises, the quantity rises owing to low entry barriers, and since the price lowers, the quantity reduces as some enterprises may opt out of the market.

A seller’s price-to-quantity connection can be used to create the supply curve. A supplier may start with a zero price for an item or service and gradually increase the price, calculating the hypothetical amount he would be prepared to offer at each price. The supplier will be able to trace out its entire individual supply function due to this method. The total of each seller’s unique supply curve is the market supply curve. 

• Derivation of Market Supply Curve

A horizontal summation of individual supply curves is a market supply curve. It depicts various amounts of a commodity that all market participants are willing to sell at various conceivable prices. The market supply curve is the horizontal total of the individual supply curves of all the enterprises in the market that produce a certain commodity.

Factors Affecting Supply

• A commodity’s price

There is a clear correlation between a commodity’s price and the quantity provided. In general, the higher the price, the greater the amount provided, and the lower the price, the lesser the quantity provided.

• Prices of Other Goods

Because resources have many uses, the amount provided for a commodity is influenced by the prices of other goods. In comparison to the supplied product, an increase in the price of other commodities makes them more lucrative. 

As a result, the company diverts its limited resources away from producing the provided item and towards producing other commodities. For example, if the price of another thing (say, wheat) rises, the farmer will be enticed to plant wheat instead of the supplied commodity (say, rice).

• Technological breakthroughs

This is one of the vital aspects of supply. A product’s manufacturing is enhanced by better and more current technology, increasing the product’s supply.

Agricultural productivity is boosted through the production of fertilisers and high-quality seeds, for example. It increases the number of food grains on the market even more.

• Taxation Policy of the Government:

Changes in taxes have the opposite impact on a product’s supply. When the government raises taxes, the product’s profit margin shrinks. As a result, the supply of the producer is lowered.

On the other hand, the government frequently uses tax advantages and subsidies to increase the supply of certain commodities by assuring a bigger profit margin for the suppliers.

• Prices of related goods:

The cost of replacements and supplementary goods influences the supply of a product. Farmers, for example, will plant more wheat than is necessary if the price of wheat rises. The amount of rice available on the market would be reduced as a result.

Conclusion

The market supply curve is calculated by adding the number of goods providers are willing to produce at a particular price. Consequently, it displays the price-to-quantity combinations accessible to the item or service’s customers. The market supply curve is required for estimating the market equilibrium price and quantity when used in conjunction with market demand. 

Several critical variables determine a commodity’s supply. Changing any of the above factors will cause a shift in the commodity’s supply. To better understand the concept at hand, read Concept of Supply, Market Supply Schedule, Supply Curve, and its Slope.