Topic 4: supply

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Business people think of demand as the consumption of goods and services. At the same time, they think of supply as their production. As they see it, supply means the quantity of a product supplied at the price prevailed at the time. Economists are concerned with market as a whole. They want to know how much of a certain product sellers will supply at each and every possible market price. Supply may be defined as a schedule of quantities that would be offered for sale at all of the possible prices that might prevail in the market. Everyone who offers an economic product for sale is a supplier.

The law of supply states that the quantity of an economic product offered for sale varies directly with its price. If prices are high suppliers will offer greater quantities for sale. If prices are low, they will offer smaller quantities for sale. Since productivity affects both cost and supply it is important that care can be taken in selecting the proper materials. Productivity and cost must be kept in mind in order to make the best decision. It means a business must analyse the issue of costs before making its decisions. To make the decision-making process easier we try to divide cost into several different categories.

Fixed cost — the cost that a business incurs even if the plant is idle and output is zero. It makes no difference whether the business produces nothing, very little, or a lot. Fixed costs include salaries paid to executives, interest charges on bonds, rent payments on leased properties, local and state property taxes. They also take in depreciation — the gradual wear and tear on capital goods over time.

Variable cost — a cost that changes with changes in the business rate of operation or output.

Total cost -— is the sum of the fixed and variable costs. It takes in all the costs a business faces in the course of its operations.

Marginal cost — the extra or additional cost incurred when a business produces one additional unit of a commodity. Since fixed costs do not change, marginal cost is the increase in variable costs, which stems from using additional factors of production.