Naive criticism of the law of supply. The essence of the proposal, the law of the proposal, consequences from the law of the proposal. Price factors influencing the offer

Offer shows how many products will be offered for sale at different prices.

Supply law:

All other things being equal, i.e. if resources are available in sufficient quantities and there is no overproduction of goods, then there is a direct relationship between price and supply, i.e. if the price rises, then the supply increases, and if the price decreases, then the supply decreases.

Let's analyze the sales prices of a certain product:

Consequences from the supply law:

With rising prices, entrepreneurs get additional income, which creates incentives and provides opportunities for expanding production.
With a rise in prices, other manufacturers with higher costs may enter the industry for the production of this product, which creates the preconditions for increased competition in the market.

On market offer influenced by price and non-price factors.

Price factors influencing the offer:

1. Price of the product - there is a direct relationship between the price and the offer, as reflected by the law of the offer.

2. Prices for resources - if prices for resources rise, then the supply decreases. This happens for 2 reasons:

firstly, the product will cost more and this will reduce demand.
secondly, producers will spend more financial resources on the purchase of resources, therefore they will buy less of these resources.

3. Prices for related products - ie. goods are interchangeable and complementary.

With an increase in prices for one of the interchangeable goods (tea), the supply of other goods (coffee, cocoa) will decrease.
When the price of one of the complementary goods (gasoline) rises, the supply of others (cars) will increase.

Non-price factors affecting the offer:

Improvement of technique and technology- the use of modern technology and high technologies leads to an increase in labor productivity, which increases the supply.
Taxes and subsidies- if the level of taxation in the country is high, then the producers receive less income and reduce the supply. If the government provides subsidies to producers, then they increase the supply of goods.
Number of manufacturers on the market- the more manufacturers of a given product, the wider its offer.
Manufacturers' expectation of price increases- if manufacturers expect an increase in prices for their products, then they keep them in the warehouse and resume their shipment as soon as prices have increased.

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8.2 Explanation of the law of supply

This is reflected in the law of supply: the larger the supply, the higher the price. The supply law is explained by the presence of two effects:

the effect of increasing opportunity costs: with an increase in the volume of production of a given product, its opportunity costs (expressed in the refusal to produce another product) grow. Therefore, the manufacturer will be ready to offer more volume at a higher price. As discussed in the Opportunity Cost chapter, usually in economic analysis the assumption of increasing opportunity costs is accepted.
The effect of diminishing marginal productivity: with an increase in the volume of production of a given product, more and more resources need to be spent for each additional unit (since marginal performance resource falls with an increase in the volume of production of goods). Therefore, the manufacturer will be ready to offer a larger volume only at a higher price.

To summarize these two effects, the supply curve is generally upward sloping because resource owners need to be offered higher prices to give them incentives to produce more and sacrifice alternative activities.

The supply is associated with opportunity costs because by using resources for the production of a given product, the manufacturer distracts them from using other possible products. Therefore, the price of a given product must cover the best alternative resource use. This rule underlies the construction of the supply curve, and we will use it in solving problems for the chapter.

Thus, we have seen that both supply and demand are associated with opportunity costs. For the consumer, opportunity costs were important in connection with the possibility of replacing one product with another in consumption (the consumption of one product is associated with the refusal to consume another). For a producer, opportunity costs are important in connection with the alternative use of resources: the production of one good is associated with the refusal to allocate resources in favor of another good.

From a producer's point of view, prices in an economy carry information about alternative uses of resources. You can understand this idea at simple example... Let's say a large Russian retail chain (for example, Magnit) decides to open another large store in a small regional Russian town. How will this affect the level of wages of workers in the city?
They are more likely to grow. Many people in this city, who previously worked as drivers, secretaries, street cleaners, salespeople, will now find that they have a new alternative - to work in the new Magnit store with competitive salaries. Given the availability of this alternative, former employers will be forced to raise workers' wages in order to keep them in their jobs. In other words, the new higher wage carries information about the emerging alternative to be hired in the "Magnit" network.

Thus, we have just seen that the offer price of a product consists of alternative cost resources used in its production. It is this fact that determines the fact that economists are very positive about the institution of property. When resources are not owned by anyone, users do not have to pay an opportunity cost and are therefore underestimated and used carelessly. When resources are privately owned, the market forms prices based on the opportunity cost of using the resources. If the resources are not owned by anyone, opportunity cost ceases to be the basis for determining value.

When studying the topic "Proposal", it is important not to confuse concepts such as "offer" and "Supply value"... The offer reflects the volume of planned sales at all possible levels of the price of a product or service, that is, it graphically represents the entire supply curve graph. The amount of supply is the amount of the good that sellers are willing to sell at a particular price level, and represents one point on the supply curve graph. An increase in supply means that at each price level, producers are willing to sell more goods than before. With increasing supply, the supply curve shifts to the right - down... A decline in supply means that at each price level, producers are willing to sell less than before. With a decrease in supply, the supply curve shifts to the left - up.

It is important to understand that the supply curve depicted in coordinates P-Q, this is the dependence of the supply on the price. Having received this dependence, we fix all the other factors that affect the seller's decision to sell the goods. Suggestion function Q s = f (P), means that we applied the principle of "other things being equal" in its construction.
If we try to change the non-price supply factors, we get a new supply curve in P-Q coordinates.

Thus:

A change in supply is a shift in the entire supply curve, that is, a change in the value of supply for all possible values of the price of an economic good;
A change in the amount of supply is a shift along the supply curve associated with a change in the price of an economic good. When the price of a product decreases, manufacturers will tend to offer less quantity for sale. When the price of a product rises, the consequences are exactly the opposite.

Reaction of the supply value to price changes

Supply response to changes in non-price factors

The market situation is shaped by two economic categories: supply and demand. To satisfy their own needs and under the influence of preferences, buyers are forced to purchase certain goods or services on the market. However, their capabilities are limited by the behavior of manufacturing firms that directly supply the market with a demanded product.

The supply on the market of goods and services is characterized by the volume of commercial products that manufacturers, intermediaries or sellers are willing to put up for sale at various alternative prices within one time period. The amount of supply on the market, its structure is directly determined by consumer demand, that is, the buyer's desire to purchase this particular type of product for current or future consumption, as well as the level of profitability or solvency of an economic entity. In accordance with the above, it turns out that the law of supply reflects a direct relationship between the volume of production and the level of established market prices. In other words, if prices on the market for goods and services, factors of production, financial market etc. are systematically growing upward, the manufacturer automatically decides to produce and supply to the market for sale an ever larger volume of products, works, services.

The supply is influenced by two types of factors:

1) price factors. They are inextricably linked to the pricing process, be it prices for finished products or for the primary raw materials that go into its manufacture. Accordingly, if the general level of market prices is low, this will be accompanied by high costs for producers, especially if the prices of inputs and factors of production are too high. In this case, the proceeds from the sale of manufactured products will be practically all spent on covering costs and paying taxes;

2) non-price factors:

a) the dynamics of prices for resources. To carry out production activities, the company purchases raw materials and necessary equipment... With an increase in prices for fixed assets, working capital and production resources, the costs of the enterprise will also grow steadily. The growth in costs, in turn, forces the firm or enterprise to reduce production activities until the unit price is equal to or below marginal cost; as a result, the supply begins to decline;

b) the development of new technologies allows the manufacturer to increase production efficiency and, as a result, the number of products produced. Introduction of new main production assets and technological discoveries (machinery and equipment) in production contributes to a decrease in the indicators of material consumption and labor intensity and an increase in capital productivity. In other words, the process of expanding the scale of production becomes real;

c) the dynamics of the value of taxation. Taxes are the regulator of the state budget; they are periodically (as a rule, once a month) withdrawn from the income of all economic entities. The higher the tax rate and the amount of tax to be deducted, the lower the potential for further development becomes. This can lead to the emergence of such problems as the shadow economy and income hiding. For example, an increase in the tax rate on profits and land, interest rates on rent, as well as other deductions. For example, an increase in the value of a single social tax leads to the fact that the organization has fewer opportunities for further development, since the total costs as a whole may be at the level of profit or, if the organization is in a state of crisis, even exceed it;

d) the number of sellers in the market. At perfect competition due to the homogeneity of the goods produced, the supply dynamics can be violated, since the supply of products in its value does not correspond to the demand.

The supply law is one of the main laws affecting pricing and underlying market regulation of prices. Knowledge of this law allows you to better understand the essence of the market and market movements, but more on that later, now we will talk in more detail about the proposal.

What does the supply law say?

Before moving on to the law itself, let us define the basic concepts.

The offer is a set of goods (products) and services presented by the manufacturer for sale at different values of the price (value).

The amount of the offer is specific amount(number) of goods that the seller agrees to sell (offer) at one specific price.

The offer price is, the so-called minimum price (value) at which the seller agrees to sell a certain (certain) quantity (volume) of goods.

And now the law itself. The supply law states: there is a direct relationship between the change in prices and the quantity of goods offered for sale. If this build schedule given dependence (supply curve S), then it will look like this:

As in the analogy with the demand curve, S1 indicates an increase in supply, S2 indicates a decrease. Movement on supply curve S0 will indicate either an increase in the supply value (up the curve), or a decrease (movement down the curve). The main non-price factors that shift the supply curve S0 to S1 or S2 in this case are as follows:

Resource prices
Technologies used
The number of sellers (producers) in the market and the degree (coefficient) of its monopolization
Government taxes and subsidies
Manufacturers' expectations
The price of interconnected goods (in this case, there is an inverse relationship, a correlation between the price, cost for one product and the supply of another) and for complementary ones (an increase in the price of one will lead to an increase in the supply of the other).

It is also worth saying a few words about functions suggestions. It will look like this:

Qs = a + bP = kP + b

From the author

It was not by chance that I began to talk about what demand is, and about supply and demand law generally. After all, these topics fully reveal the essence of market mechanisms. If you are a trader (who is a stock trader) or just a Gazprom shareholder trying to make money on the stock exchange, then you probably know that asset prices (about the difference between assets and liabilities here) or financial instruments in general, like stocks (what are corporate shares ) or futures (what are exchange-traded futures) are in constant motion. In many respects, the reasons are as follows: when demand grows, the number of those wishing to purchase a financial instrument (which were with cash) increases, and sellers (supply) begin to suffice. Moreover, those who made a wrong forecast and closed short positions (shorts) - now in the hope of an upward trend - also join the mass of buyers, so there are even more buyers. As demand increases, buyers are ready to buy the desired instrument (or just some kind of commodity) at a price higher than the current value - just to enter the position. Active buying leads to an increase in prices - a bull market is formed (about - here).

However, the price movement cannot be in one direction all the time - at some point, buyers will realize that the price is too expensive (overpriced) and will not want to buy. As the price increases, there will be fewer buyers (negative dynamics) and at some point the price will fix near a certain level and will be at it for some time (the trend does not change quickly). The number of buyers and sellers becomes approximately equal and the market begins. balance... In this case, the price begins to move in a sideways corridor (consolidation period). However, by the way, a trend reversal can be confused with a market correction (pullback) - it is also important to remember this for novice investors (who are investors) trying to invest money in the hope of a market reversal (read here).

On the contrary, if many owners of assets want to sell them (to make a profit, for example), then the movement will occur in the opposite direction to the previous direction. Too high prices led to the desire of sellers to start selling more (and this follows from entities supply law). When there are not enough buyers for all those willing to sell, sellers will be forced to reduce the price, which will lead to a downward market movement.

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Thus, market price movements always depend on the ratio of buyers and sellers in the market (their balance). In the stock market, the operation of the law of supply and demand manifests itself more clearly than anywhere else in the economy. The law of supply and demand Of course, it explains a lot, but no one has canceled other factors (parameters) on the market, but we will talk about them in further articles on the site.

Offer Is a collection of goods that are on the market or can be delivered to it. The sale is carried out in the form of an offer, and the purchase is in the form of realization of demand. This is the volume of manufactured products that manufacturers are willing to sell to consumers at certain prices. In other words, supply is the willingness and ability of sellers to supply goods and services to the market for sale, depending on their price.

Supply law shows that manufacturers want to produce and offer for sale more of their goods at a high price than at a low price. For the seller, price is an incentive and incentive to produce and sell his product on the market. For the consumer, prices are a deterrent, as the high price forces them to buy fewer goods.

Non-price factors affecting supply

1. The cost of resources. Resource prices determine production costs. Therefore, the higher the costs, the lower the supply, and vice versa.

For example, prices for raw materials and supplies have decreased.

2. Technology. The use of advanced technology reduces the cost of production. At given prices for resources, production costs are reduced, and, consequently, supply increases. The curve is shifted to the right. If there is a rise in the cost of production, then this will cause a shift in the supply curve to the left.

3. Taxes and subsidies. Raising taxes reduces the opportunities for producers, reduces production volumes, which leads to a shift in the supply curve to the left. With the reduction in taxes, the picture is reversed.

Subsidies are government subsidies, assistance to certain producers. This contributes to the growth of production and supply, shifts the supply curve to the right.

4. Expectations. In anticipation of price increases, manufacturers sometimes hold back the product in order to create a temporary shortage of the product and accelerate price increases.

5. Competition. The more firms on the market, the greater the supply, and vice versa.

Non-price factors lead to a change in supply, which is expressed in a shift in the supply curve: to the right, if the supply increases, and to the left, if the supply decreases.

Graphically, it looks like this.

From the above, it is clear that the factors influencing the supply curve are in the plane of the motivation of human activity in the economy. This proves once again that commodity producers are engaged in commercial and economic activities just for the sake of profit. If the prices for manufactured products rise, it means that the society needs goods of this kind, "informing" the producers about this by purchasing the goods at a given price. If such a price level compensates for the costs of commodity producers, then this serves as an exact criterion for the expediency of production and compliance with its demand.

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