The law of supply in economics is a microeconomic law. It lies in the fact that, other things being equal, as the price of a service or product rises, their number on the market will increase, and vice versa. This means manufacturers are willing to offer more products for sale, increasing production as a way to increase profits.
Historical background
The law of supply in economics is fundamental and fundamental. This theory assumes market competition in a capitalist system. It describes how supply and demand interact. The British philosopher John Locke was the first to notice this connection. As a general rule, if the change in supply is increasing and demand is low, the corresponding price will also be low, and vice versa. This theory is finally used in the famous "Inquiry into the Nature and Causes of the We alth of Nations" by Adam Smith. It was published in Great Britain in 1776.
Offer,supply factors
The law of supply is closely related to the demand for a good or service at a particular price. This is a fundamental economic concept. It describes the total amount of any product that consumers can purchase. The supply provided by the producers will grow along with the rise in price, as all firms strive to maximize profits. It can refer both to a certain price category, and to a whole range of prices.
Graphic representation
The graphical representation of supply curve data was first used in the 1870s in English texts. It was then popularized in the seminal textbook Principles of Economics by Alfred Marshall in 1890.
It has long been discussed why Britain was the first country to adopt, use and publish the theory of demand and supply price. The Industrial Revolution, the emergence of the British economic center, which included heavy manufacturing, technological innovation and a huge workforce, was the reason.
Related terms and concepts
Related terms and concepts in today's context include supply chain allocation and money supply. Financial flow refers specifically to the entire stock of currency and liquid assets in a country. It is necessary to analyze and control the laws of the market economy. To do this, policies and rules are formulated based on fluctuations in the money supply. This happens through control.interest rates and other similar measures.
Official money supply data for a country must be accurately recorded and published periodically. The European sovereign debt crisis that began in 2007 is a good example of the role of a country's financial flow and global economic impact.
Another important supply-side concept in today's world is the allocation of global supply chains. It is aimed at effectively linking all the principles of the transaction, including the buyer, seller and financial institution. This reduces overall costs and speeds up the process of doing business. Such a procedure is often made possible by a technology platform and affects industries such as the automotive and retail sectors.
Demand and supply
Trends in supply and demand form the basis of the 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 an equilibrium point where supply equals demand (no surplus or shortage). 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 selling one unit of service orgoods. Its increase almost always leads to an increase in supplies. A fall, on the contrary, will lead to their decrease. This means that a higher cost leads to more sales, and a lower cost leads to less. This positive interaction is called the law of supply in economics. It assumes that all other variables remain constant.
Delivery and Quantity Delivered
It is necessary to understand these concepts as well. In economic terminology, the supply is not the same as the quantity of goods. When experts refer to it, they are referring to the relationship between price ranges and stocks. It can be illustrated with a supply curve or a supply schedule. In this case, only a certain point is meant. To put it simply, the offer refers to the curve, and the quantity supplied refers to a certain point on it.
Replacement item
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 the demand for X increases as the price of Y increases, or if there is a positive cross elasticity of demand.
Replacement conditions
There must be a certain relationship between identical goods. They can be as close as one brand of coffee to another. Or slightly further apart, such as coffee and tea. When examining the relationship, it can be seen that as the price of a product rises, the demand for its substitutesincreases. If, for example, coffee becomes more expensive, tea sells much better. This is because consumers are switching to it to maintain their budgets. The same principle works in the reverse situation.
Types of replacement
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 fully or partially satisfies the consumer.
The ideal is a product or service that can be used in exactly the same way as the one it replaces. In this case, the utility should be largely identical. A bicycle and a car are far from perfect substitutes, but they are similar in that people use them to get from point A to point B, so there is some measurable relationship in the demand curve.
Say's Law
This market law was developed by the French economist and journalist Jean-Baptiste Say in 1803. He contradicted the view that money is the source of we alth. 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 laissez-faire in the economy. It is still valid in today's neoclassical economic models, which assume that all markets are clear.
The Great Depression proved that countries can experience major crises. Market forcescan't 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 seminal 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 businesses collectively seek to increase net savings and thereby reduce debt. This requires earning more than you spend, which is contrary to Say's law.
Inflation
Inflation expectations are consumer expectations about future inflation. They affect not only aggregate but also market demand. Buyers seek to purchase goods at the lowest possible cost. If they expect prices to rise in the future, they increase their purchases in the present.
If buyers expect prices to drop, they reduce their needs in the present. Thus, a strong bond is created. It is formed between price and inflation expectations and aggregate market needs. If people expect higher inflation in the future, they increase consumer spending now, and vice versa. In each case, housewives tend to buy goods at the lowest possible prices.
Impact on inflation
Inflation expectations are affected by the following factors:
- Current inflation rates. They are the biggest guide to expectations for the future.
- Past trends. For example, a bad inflation history is likely to make people more pessimistic.
- General economic outlook. For example, the prospects for growth and unemployment. However, it is not entirely clear that people make the same links as experts. For example, if there is a prospect of a decline in unemployment, we expect inflation to be lower. Some people may simply equate declines with bad news such as rising prices.
- Wage growth.
- Monetary policy. If people feel that the government is ready to expand the economy and risk inflation, then they may start to expect more inflation.
Practical examples
The law of supply in economics summarizes the impact of price changes on the behavior of producers. For example, a business will make more gaming systems if the benefits from them increase, and vice versa. A company can supply 1 million systems if the price is $200 each. If the price increases to $300, it can supply 1.5 million systems.
To further illustrate this concept, consider how gas prices work. When gasoline rises in price, it is recommended that firms take several actions to change supply in order to make a profit:
- expand oil exploration;
- produce more oil;
- invest more in pipelines and transport tankersraw materials to factories where they can be processed into gasoline;
- build new oil rigs;
- purchase additional pipelines and trucks to deliver gasoline to gas stations;
- open multiple gas stations or keep existing gas stations open 24/7.
Economic equilibrium
The equilibrium point in the economy is the 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 occurs when the quantity demanded and the quantity supplied are equal. Market equilibrium in this case means the condition under which the price is established through competition. At the same time, the volume of goods or services requested by buyers is equal to the volume of production.
This price is often called competitive or market price. It will generally not change unless demand or supply changes. The supplied quantity is also called competitive or market quantity. However, this concept in economics is also applicable to imperfectly competitive markets. In this case, it takes the form of a Nash equilibrium.
