Proposal: concept, factors, elasticity

An offer is an amount of goods or services offered for sale to markets, or which at a given time and place can be obtained by people who wish to buy them. The volume of supply is influenced by many factors, but one of the main ones is the price.

There is a positive or direct relationship between the price and the quantity of the product or service offered: as the price increases, the value of the offer increases accordingly; with a decrease – the supply is reduced. This specific relationship is called the law of supply (Fig. 8.4.).

The minimum price at which the seller agrees to sell his goods is called the bid price. Below this price, the goods cannot be sold, because in this case its production will be unprofitable.

The law of supply can be expressed in the form of a table or depicted on a graph in the form of a curve (Fig.8.5.).

However, the concepts of “change in the quantity (volume) of the supply” and “change in supply” should not be confused. The first can be expressed by moving on a constant curve from one point to another as a result of a change in the price of a given product. A “change in supply” means that the supply curve can change its position, shifting left up (the sentence decreases) or right down (the supply increases). The shift in the supply curve is influenced by the following non-price factors:

Changes in resource prices, which affect the change in production costs, and ultimately on supply (lower prices for mineral fertilizers increases the supply of wheat; higher prices for sprinkler plants reduces the supply of corn).

A change in technology (the creation of a more effective remedy against the Colorado beetle increases the supply of potatoes). Changes in taxes and subsidies (an increase in the excise tax on cigarettes reduces their supply; an increase in subsidies to farmers will lead to an increase in the supply of agricultural products). Changes in prices for other goods (lower prices for lamb and pork increase the supply of beef). Changing expectations (the expectation of lower prices for alcoholic beverages in the future will force their producers to increase the current supply of these products). Change in the number of suppliers (an increase in the number of companies that conduct shoes will increase the supply of these products).

Supply, like demand, can be distinguished into “elastic” and  “inelastic.” Price elasticity is the degree of response of the volume (value) of supply to changes in the unit price of a good or service. The coefficient of elasticity of supply by price is calculated by the formula:

C.e.p.c. = percentage change in supply volume : percentage change in price

It should be noted that the situation of inelastic supply is more attractive for the seller, which guarantees the stability of production in case of a sharp change in price. Therefore, they seek to become monopolists in the production of this product and artificially limit the volume of output, and consequently, the amount of supply.

The elasticity of supply depends on the difficulty of reallocating resources among alternative areas of their use. In turn, this resource mobility depends on the amount of time available to producers to adapt to a given price change. The more time available to the manufacturer to respond to changes in demand, the stronger the corresponding changes in production will be.

Within the current (instantaneous) market period, the producer does not have enough time to change the volume of production, so the goods already produced are sold at a fixed market price, i.e. supply adjusts to demand. So the sentence turns out to be completely inelastic, i.e. K.el.p.c. = 0, and the sentence curve will have a vertical appearance.

Within the short term, production capacities remain unchanged, but the volume of production can be changed due to the intensity of their use and due to changes in variable factors of production (intensification of labor, quantity of materials, inventories, etc.). Therefore, the sentence becomes more elastic (K.el.p.c > 0) and the supply curve deviates from the vertical position.

Over a long (long-term) period, all desirable measures (including changes in the capacity of the enterprise) aimed at adapting to the changed demand can be taken, and supply becomes even more elastic, reaching a maximum value, and the supply curve takes a more gentle, and finally horizontal position.