The Market

What is supply?

Supply is the amount of a product firms are willing and able to provide at different market prices in a given time period

Distinguish between individual and market supply

Individual supply is the willingness and ability of a single firm to sell a product. A market is made up of many sellers. Market supply is the total amount of good all firms are willing and able to sell

What is the relationship between price and supply?

Supply rises as price rises. There is a positive relationship between price and quantity supplied. 

What is a supply curve?

A supply curve is a graph showing the amount of a product producers are willing and able to sell at different prices, in a given time period

Why do supply curves slope upwards?

Normally producers need a price rise to raise output, as the cost of making extra items rises with output

How is supply affected by a rise in price?

A rise in the price of a product causes an extension in supply (increase in quantity supplied)

How is supply affected by a fall in price?

A decrease in the price of a product causes a decrease in quantity supplied

What is an extension in supply?

Is an increase in quantity supplied caused by a rise in the price of a product

What is a contraction in supply?

Is a decrease in quantity supplied caused by a fall in the price of a product

List 7 other non-price factors affecting supply apart from the price of the product

• Costs of production
• Productivity
• State of technology
• Price of other products the firm can make with its resources
• Unexpected events
• The number of firms in the industry
• Indirect taxes and subsidies

How do costs of production affect supply?

The cost of inputs such as wages, rent or interest, prices of raw materials, fuel and energy affect the amount of a product producers are willing and able to sell at different prices. A fall in unit costs increase supply, at every price.

How is productivity and supply linked?

Productivity refers to output per worker. A rise in output per worker reduces unit costs and raises supply

How is productivity and supply linked?

Productivity refers to output per worker. A rise in output per worker reduces unit costs and raises supply

How can technology affect supply?

Innovations that lowers unit costs increases supply

What are goods in competitive supply?

Goods in competitive supply are alternative products a firm can make with its resources

What is the effect of an increase in the price of other products the firm can make with its resources?

• Out of production of this product, reducing its supply
• Into the production of the alternative item, increasing its supply

Why can unforeseen circumstances affect supply?

Unexpected events such as floods or disease destroy products or increase the cost of production, reducing the supply

Link the number of firms in the industry with supply

An increase in the number of firms increases the willingness and ability of producers to sell a product

How do indirect taxes affect supply?

An indirect tax is a charge imposed by the government on the sale of goods or services. Indirect taxes increase unit costs and reduces supply. 

How do subsidies affect supply?

Subsidies are payments made by the government to producers. Subsidies reduce unit costs and so increase supply. 

What causes a shift in a supply curve?

It only shifts when there is a change in a non-price condition of supply. 

List 6 reasons for a supply curve shifting to the right (shifts to the right when more of a product is supplied at each and every price)

• A fall in costs of production as a result of lower wages, petrol or energy prices, interest or rent payments
• Improved productivity or the successful introduction of new technology
• Lower indirect taxes or higher subsidies
• A fall in the price of products in competitive supply encouraging firms to switch into this industry or rise in the price of goods in joint supply
• Beneficial unforeseen circumstances e.g good weather increasing the harvest

What is equilibrium price?

Is the price where demand and supply are in balance. Market price occurs when demand equals supply

Define excess supply

Excess supply exists when supply exceeds demand at a given price

Define excess demand

Excess demand exists when demand exceeds supply at a given price

Explain market shortage

Shortages occur in markets when demand exceeds supply at a given price. Consumers are unable to buy all they want at what price. 

What does clearing price mean?

Is the one price which leabes neither unsold procuts nor unsatisfied demand 

What is equilbrium output?

Equilibrium output is the amount traded at the equilibrium price

What causes a change in market price?

Market price changes in response to a change in one of the underlying non-price conditions of supply or demand

Does a change in the price of a product shift its demand or supply curve?

A change in price of a product never causes a shift in the supply or demand curve for that item. A product's demand or supply curves shift only if there is a change in a condition of supply and demand

What is capacity?

Capacity is the maximum amount a firm can make in a set time period using all its current resources

Give 3 reasons why capacity mangement is an important issue

• Meet demand whil making full use of all equipment and staff to minimise costs
• Increase output quickly if there is an unexpected surge in demand
• Cut output quickly if there is an unexpected fall in demand without alienating staff

Can firms operate below capacity?

Capacity sets a limit on the amount a firm can supply. The amount a firm can sell depends on the market. If demand is sufficient to buy up all potential output, then the firm has to operate below capacity with idle staff and machines. 

Why is spare capacity inefficient?

Spare capacity means the firm is paying interest for idle equipment and an under utilised workforce. Stocks of unsold products may increase. 

Explain underutilisation

Occurs when an organisation is operating well below its maximum potential level of output. 

How can firms react to excess supply in the short run?

• Maintain the current level of output and build up stocks of unsold products- reducing staff hours and means the firm can meet any upsurge in demand that may lead to cash flow problems
• Stop overtime or reduce the working week (e.g 4 days)
• Reduce the number of shifts and layoff workers 

How are excess supply and price linked?

Firms left with unsold stock and an overdraft may try to increase sales and generate cash flow by cutting prices. Profit margins fall. 

Why are firms reluctant to making staff redundant?

Staff are the major asset of any business and the source of competitive advantage. Losing staff means losing expertise and incurring redundancy costs. 

What happens if the fall in demand is long term?

Firms respond to short term falls in demand with short measures (building stocks, cutting overtime etc..) eventually they may decided to reduce capacity by reducing the labour force and premises

Explain rationalisation

Involves reducing capacity by selling or closing premises and/or making staff redundant. Rationalising lower unit costs and so increases competitive- assuming no lost economies of scale

Give 3 ways firms can tackle spare capacity

• Rationalise- selling or closing premises or making staff redundant
• Lease out idle plant and machinery- or transfer staff to other sections of the business
• Seek to boost sales by targeting new overseas markets

What is meant by market structure?

Market structures are the characteristics of a market, e.g the number of firms in the industry, barriers to entry and the extent to which rival firms compete for customers

Define an industry

An industry is made up of all those firms producing similiar products

What is a competitive market?

A competitve market is made up of any rival sellers each competing for the same customers

Are all market competitive?

In industries dominated by a few large firms (oligopoly) or a single seller (monopoly) there is little or no competition

How can firms compete with each other?

• Price; by offering products with the same features at a lower price than rivals
• Prodcut: by offering products with better features at the same or higher price than rivals

What is market power?

Market power is the ability of the firm to influence market price

Why are some markets competitive?

When firms are free to enter or leave an industry- no barriers to entry obstructing rivals

Can competition be measured?

Concentration ratios measure the proportion of total sales (market share) of the largest firms. Low concentration ratios indicate competitive markets

Why do firms seek to enter a market?

Motivated to enter markets if they believe they can make profits to justify costs and risks invovled

Are firms free to enter a market?

In some markets there are barriers to entry which make it difficult or impossible for new firms to join and compete for customers

What are barriers to entry?

Barriers to entry are the obstacles that restrict firms breaking into a market and competing with established firms

Describe 4 barriers to entry that can prevent or hinder firms joining an industry:

• Law: legal barriers include patents and copyright
• Access barriers: new firms are deterred if they cannot gain access to suppliers or distributors
• High entry costs: of setting up production, hiring staff, investing in equipment and advertising to establish sales
• New firms initially have low sales- higher unit costs- cannot enjoy economies of scale of mass production like already existing businesses

What is the impact of increased competition on consumers?

• More choice: more firms means more substitute products on sale
• Lower prices: one way firms compete is by offering lower prices than rivals
• Improved products: offering better featured prodcuts

What is the impact of increased competition on producers?

• Maintain low prices and offer best value for money when compared to substitutes
• Invest in research and development: to ensure the product keeps up with latest technological advances
• Lower profit margins- charging high prices loses customers to rivals
• Firms have an incentive to make best use of resources

What is the impact of competition on the market?

An increase in the number of firms offering a product, shifts the supply curve to the right, causing a fall in price

List the 4 main categories of market structure

• Perfect competition: no barriers to entry where many firms produce identical products
• Monopolistic competition: low barriers to entry where firms produce differentiated products
• Oligopoly: high barriers to entry where a few large firms dominate the market
• Monopoly: high barriers to entry where a single firm supplies the market

List the 7 characteristics of 'perfect competition'

• Many small firms
• No barriers to entry
• New entrants is easy
• Many substitutes
• Normal profits
• Varied customers
• Low concentration ratio

List 7 characteristics of an 'oligopoly'

• Few large firms
• High barriers to entry
• Difficult to new entrants
• Few substitutes
• Super normal profits
• Limited choice of customers
• High concentration ratio

List 7 characteristics of a 'monopoly'

• One firm or 25% market share
• Very high barriers to entry
• Very difficult or impossible for new entrants
• Few or none substitutes
• Super normal profits
• Limited or no choice of customers
• Very high concentration ratio

What is product differentiation?

Product differentitation occurs when firms make their product distinctly different from goods or services offered by rivals

How can firms differentiate their products?

• Adjust the marketing mix
• Make items distinct from those offered by rivals
• Establish a brand image using advertising
• Suggest an item that meets needs of customers better than rival products

Why do firms differentiate their products?

Product differentiation is a source of market power and creates a barrier to entry enabling high long run profits to be sustained