Oct 31 2013
The Supply Of Supply And Demand

When Supply is the same as the Demand all parties are content.

Supply is that product on the shelf waiting for you to buy. Attention-grabbing, isn’t, as it seems that whatever you want it’s available when you’re ready to buy. Sure, shortages happen however they are not the norm in any free market economy. The norm in a free market system is that whatever you need it it’s readily available, not only in your town or city but in every community across this great land of ours, or, you can always get it delivered to your door from the internet.

The Supply of Supply and Demand

In a strictly centrally controlled market choices are restricted by those in control. Choices are limited and often severally limited. The choices of suppliers and of products are not broad and what is available is often either in short supply or there is too much.

If we were to look at a Supply Curve we would see that it slopes up meaning quantity rises as price increases. The Demand Curve slopes down. Demand to buy becomes less as price increases. Basically, a producer prefers to supply more items at a higher price. However, the buyer wants a deal, they are likely more willing to buy at lower prices.

Equilibrium is at intersection

Placed on the same chart a Supply and a Demand Curve will meet, they will intersect. At the point where they meet is called the equilibrium. This is the point where both the producer and the buyer are satisfied, if not happy. The producer has just the right amount of items and the buyer has voluntarily made a purchase. Both are in agreement as to price and other terms to buy or sell a product.

Price tends to gravitate to this place of equilibrium. When this does not happen the producer either has too many products or too few items to satisfy the demand. Now if this happens in a clearance sale both parties are, once again, probably happy campers.

Supply Defined

Perhaps a definition has already been accomplished above, but there is one more word of clarification needed. Producers will make their product(s) available as long as they can sell it for more than it cost them to manufacture, which incorporates enough profit to meet their desires. As long as it makes sense to them to do the work necessary, pay the related costs, and take the risk for their capital invested they will tend to keep an adequate supply of their product on the shelf.

Factors That Affect Supply

There are many issues that can change the supply of any given product. While my list is not exhaustive it does embrace the six main areas that can and often do change the point of equilibrium.

1. Cost of Product

The free market system permits a producer to create any quantity they want and at any price, baring government intervention. Based on profitability you may want the higher price. However you may make more profit by selling at a lower price and sell greater volume. There are always choices. Following are issues that can impact price. A producer is always balancing quality, price and a host of other factors to decide on the best price all parties can live with. All of this seems to work out well in capitalism as long as outside intervention is held within reason.

2.  Cost of Materials

What costs are involved?

It’s interesting how material costs that may seem unrelated can affect other products. For example; large quantities of corn by those producing fuel can impact the cost of corn syrup purchased in your grocery store. Cost of materials to create a product will indeed show up in a seemingly unrelated product when it goes to market. This is one issue all producers must constantly keep in balance.

3.  Competition

A producer must always be aware of their competition in both substitute products and in complementary products as discussed in How Free Markets Work , Part 2. If hamburger meat or hot-dogs take a sudden increase in cost then complementary bread items will also take a hit in terms of their volume sold.

4.  Labor

Here is a classic example of outside intervention. When minimum wages are increased just about every employer in the country is impacted with a cost increase of their product. Although the impact is less for some employers, where labor is a small part in producing their product, the impact is much more in the fast food industry where labor needs are substantial.

5.   Regulations

A recent example of regulations imposed that impact production costs of goods is in the new health care laws business owners are facing. One regulation demands companies of a specific size work force must now give health care where they may not have done so in the past. Although this example is over simplified the point is that regulations can become too severe for a company to stay in business. Or, jobs and income are impacted. In this case many employers are reducing their employee hours in order to avoid the added Health care expenses.

In the energy field the coal industry is facing such severe regulations that many plants will be forced to close which will impact a lot of communities. Not only will jobs be lost but businesses providing goods to those families will be forced to close also.

6.  Technology 

This has increased dramatically in recent years. It will be interesting to see how Colleges and Universities will address the changes technology has made and which now lies at their doorstep. With the ability to use more and more learning materials from the internet we will probably see significant changes in how people acquire their learning information and materials.

New technologies will change the job market, in some cases for the better and in other

From a 3-D Printer

cases jobs will be lost. Technology changes the way businesses operate and the way people now do their work. The latest new products we see coming from the innovation brought about by new technology includes such items as drones and 3-D printers that are beginning to make a big impact.

Other Factors

As I mentioned this list is not exhaustive, I’m not sure one could be produced. Other issues that certainly could weigh in on production quantities may include such things as the weather, future expectations, and energy costs. And, there is more government intervention by regulations that can affect production. See what added regulation has done to the mining of coal in recent months. Other items that impact making of items include inflation, new or reduced competition, advertising by competitors or the successful advertising of a given manufacturer. Successful or disappointing sales will change the number of units made for sale. I’m sure you could add more items to this short list.

Summary

The supply of product has the same basic foundation as the demand of product. While other factors drive the type and amount of product produced they both depend on the same method of operation, freedom of choice. Both the buyer and the producer are free to choose their respective actions of buying or producing product.

Capitalism and the Free Market System are dependent on the Freedom which remains or controlled by regulation, voluntary choice and small government. The more these issues are out of balance the more our freedoms will become unbalanced with the danger of going the way of many other countries, whose citizens would rather be in a free market system as has been proven by history.

To Learn More

To better understanding these concepts on economics in America go to: onlinecourses@connect.hillsdale.edu for an online course from Hillsdale College, it is FREE.

For a good book on the subject see; A Capitalist Manifesto: Understanding the Market Economy and Defending Liberty, by Gary Wolfram, Professor of Economics.

About Joe Voutour

Joe Voutour now lives in Arizona via the Seattle WA area. He has an BA in Psychology and a Masters in Business. Joe is retired from his Life Insurance and Financial Planning career. Joe speaks, teaches and loves writing articles focused on helping people think about various businesses and other issues. His writing includes business reviews, economics, Christianity and other subjects of interest. Joe and his bride, Shirley, live in the White Mtns. region of AZ. Joe Voutour is a Founding Member of Vertical Rising.