Introduction to Supply and Market Competition

The supply curve is the graphical representation of the supply schedule. By plotting the prices on the vertical axis and the quantities on the horizontal axis, we create a visual map of the law of supply. Because of the direct relationship between price and quantity, the supply curve is almost always upward-sloping.

Individual vs. Market Supply

In a real-world economy, we rarely deal with just one seller. Therefore, we must distinguish between individual supply and market supply.

• Individual Supply: This refers to the quantity of a good that a single specific firm or seller is willing to provide at various prices.
• Market Supply: This is the sum of the supplies of all individual sellers in a particular market.

To find the market supply curve, economists use a method called "horizontal summation". This means that for every possible price point, you add up the quantities supplied by every individual seller.

Shifts in the Supply Curve

It is vital to distinguish between a "change in quantity supplied" and a "change in supply." A change in quantity supplied is a movement along the existing curve caused solely by a change in the good's own price. However, a shift in the supply curve occurs when a factor other than price changes.

When the supply curve shifts to the right, it represents an increase in supply (more is supplied at every price). When it shifts to the left, it represents a decrease in supply (less is supplied at every price).

Several key determinants cause these shifts:

1. Input Prices: If the cost of raw materials or labor increases, production becomes less profitable, causing supply to decrease (a leftward shift). Conversely, lower input prices increase supply.
2. Technology: Technological advancements and new inventions reduce production costs, which raises the supply (a rightward shift).
3. Expectations: If a firm expects prices to rise significantly in the future, they might store their current stock to sell later, thereby reducing the current supply.
4. Number of Sellers: As more firms enter a market, the total market supply increases.

Market Equilibrium: Where Supply Meets Demand

The ultimate goal of market activity is to reach equilibrium. Equilibrium is a situation where the market price has reached a level where the quantity supplied exactly equals the quantity demanded.

At this point, we identify two key values:

• Equilibrium Price: Often called the "market-clearing price" because everyone in the market is satisfied—buyers have bought all they want, and sellers have sold all they want.
• Equilibrium Quantity: The specific amount of the good traded at the equilibrium price.

What happens when the market is out of balance?

If the price is not at the equilibrium level, the market will naturally push it back through the following mechanisms:

• Surplus (Excess Supply): If the price is above the equilibrium, the quantity supplied is greater than the quantity demanded ($Q_S > Q_D$). To get rid of unsold stock, suppliers will reduce prices, which eventually brings the market back to equilibrium.
• Shortage (Excess Demand): If the price is below the equilibrium, the quantity demanded is greater than the quantity supplied ($Q_D > Q_S$). In this case, buyers will compete for the limited goods, allowing suppliers to raise prices until equilibrium is restored.

Exam Tip: Remember that the "Law of Supply and Demand" acts as an automatic stabilizer. Regardless of whether a price starts too high or too low, the competitive actions of buyers and sellers will naturally drive the price toward the equilibrium point.