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Last week I investigated how sociology used historical analysis, cross cultural research, individual case studies and the examination of changing social trends. This week I return to economics, with an examination of the nature of supply, and elasticity in a market. These theories are central to which goods get to a market, and the price at which they retail.

                Supply is the amount of any good or service that a company is willing to produce for a set price. Building on this the law of supply states that all other things remaining equal, the higher the price of a good the greater amount which is supplied. Companies cannot produce every product demanded by the market due to supply constraints and the need to remain profitable. As such it’s imperative that companies calculate the required supply, and not to flood a market. The main factors affecting the supply of a good in a market are known as the factors of production, first among these is price, if a good is expensive to produce, less are made, furthermore if the price of producing a good increases, due to external factors, for example the price of producing a plastic toy will go up if oil prices rise, as such less toys will be produced. Competition and complimentary goods also affect the supply of any given goods, in highly competitive markets its prudent to supply a smaller number, if there are a large number of complimentary goods, supply goes up. The expected future price of a good also effects supply, if a good is predicted to rise in the coming months, the supply available now will be reduced to save supplies for later use, ensuring later profitability. Conversely if the price of a good is expected to fall, it is good to increase current supply as such to reduce the impact of the reduced price. The number of suppliers in any given market also governs the total available supply. The more producers there are the more that it is possible to produce and supply to the consumer. The final factor that economists consider affecting supply, is technology, this is a catch all term to describe pretty much any other factor, and can be concerned with actual technological issuess, for example, a company invests in a new machine which allows them to produce and supply twice of much of any product for the same price as before, supply will increase. Technology however could also include factors such as a natural disaster, which may reduce the availability of raw materials and hence reduce supply.

                Supply is based on planed sales of a product. Based on the relationship between the nature of demand (See blog 2) and its interaction with supply, all sales of any given product eventually reach an equilibrium, where the quantity of a good demanded equals the quantity of a good supplied. How much a product is demanded affects the overall selling price as individuals are willing to spend more money on the product, if a product is rare, for example a mint 50 year old comic, then demand goes up relative to the quantity available, and hence price goes up. A surplus or excess of any product will reduce the relative value of any product, and reduce price. Based on this relationship it  is important that businesses manage the available supply and demands of a product to ensure god returns. Advertising helps increase demand for a product, reduced supply increases price, as such if consumers value a product demand goes up, and if this available in limited quantity, price goes up. It is to be noted that sellers commonly reduce price to a point lower than the idea market cost to gain increased market share, this tactic is common among supermarkets, especially in the run up to large events such as Christmas.

                With markets always moving to achieve equilibrium, large scale shifts in supply or demand can lead to uncertainties in a market. The price elasticity of demand give a measure of how responsive the market is to price changes, some products are inelastic, such as alcohol and petrol, both products have consistently increased in price, yet demand has remained unchanged. Other products however are very elastic and are affected by minor shifts in price, for example if a large box of Dazz is sold at £18, demand and supply will settle at this price, if a similar box of Bold enters the market at £10 the demand for Dazz drops substantially. This occurs because Bold is a close substitute for Dazz and hence acts to increase the elasticity of the market. The web has increased the elasticity of many products, as it has allowed a greater awareness of many products substitutes, hence the relative price falls.

                Similar elasticity exists for supply, as the cost of producing any products may vary as a function of the quantity demanded. if the cost per unit of producing an item does not vary based on the quantity produced, its supply can be considered inelastic, if there is a price point that any quantity of units can be produced then the supply can be considered elastic.

                 So why do we care about supply? The web has turned most of the globe into one big market place, hence the supply of the majority of items has increased. This means that the relative price of products have fallen, allowing consumers increased power in the market. Consumers have freedom and power, potentially reducing the relative importance of traditional economic theory.  

Until next time!