The Fundamentals Of Law Of Supply

Supply is another fundamental component in market analysis, which relates to the behavior of production and sales within the market place. The supply represents what producers are willing to sell over a wide range of prices for any given time period. The producer is willing to produce a product whilst the market price is parallel to or greater than production costs. Therefore the total supply being the quantity the producer brings to the market place. Market supply is represented by an increasing sloping charge on the vertical axis and quantity on the horizontal axis.

An increase in price will result in an increase in quantity of a product brought to market, therefore the relationship between the price and supply is positive. Factors that affect market supply behavior include; the number of producers bringing the same product to the market place, technology, the price of other commodities which could be produced, and the weather. Greater profits are the result of higher prices which in turn result in expanded production thereby increasing supply. The increase in supply will eventually satisfy the underlying demand, so therefore future production needs to have a new demand in the product for the price increase to be sustained. Consumers are not interested in what it may cost to produce the item; low prices can be an indication of over production or lack of consumer interest.

How Supply and Demand Determine Market Prices
Price is determined along the interaction of supply and demand. An interchange of goods or services will occur if buyers and sellers can agree on a cost. Whenever an interchange occurs, the agreed upon price is called the "equilibrium price", or a "market clearing price”. Both buyers and sellers are willing to exchange the quantity "Q" at the price "P". At this point supply and demand is in balance or “equilibrium". At any price below P, the quantity demanded is greater than the quantity supplied. In this situation consumers would be anxious to acquire product the producer is unwilling to supply resulting in a product shortage. When there is a shortage of a product the consumer would need to pay a higher price to get the product that they want; as producers would demand a higher charge in order to bring more products on to the market. The end outcome is a rise in prices to the point P, where supply and demand are formerly again in balance. Conversely, if prices were to rise above P, the market would be in surplus - too much supply relative to the demand. Producers would have to lower their prices in order to open the market of excess supplies. Consumers would be induced by the lower prices to increase their purchases. Prices will fall until supply and demand are again in equilibrium at point P.

Equilibrium price changes with supply and demand. For example, the recent increase in supply of oil in the Middle East, with more products being made available over a range of prices. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more but only at a lower price. This can be illustrated graphically. Any change in demand due to changing consumer preferences will also influence the market price. Whenever there has been a shift in demand of coca cola drinkers toward the Cola A variety, away from the Cola B variety. A decline in the preference for Cola B shifts the demand curve inward, to the left. With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance. In order for prices to increase producers will have to reduce the quantity of Cola B brought to the market place or find new sources of demand to replace the consumers who withdrew from the marketplace due to changing preferences or a shift in demand.