Civil Engineering Reference
In-Depth Information
SUPPLY AND THE PRICE DETERMINANT
The law of supply states that more goods are supplied at higher prices, other things
being held constant. This is because at higher prices there is greater scope for firms
to earn a profit. Firms already in the market have an incentive to expand output,
while higher prices may also enable those firms on the fringes of the market to enter
the industry. At higher prices, therefore, the increased quantity supplied is made up
by existing firms expanding output and a number of new firms entering the market.
For example, in
Table 5.1
we showed that in our hypothetical industry at a price
of £5 per unit market supply was 300 units per day, but higher prices enticed other
firms into the market and total supply increased.
SUPPLY AND NON-PRICE DETERMINANTS
Up until now, we have discussed supply and its related curve on the assumption that
only price changes. We have not effectively considered any other determinants that
influence producers' behaviour. We have constantly reiterated the ceteris paribus
qualification, that other things are held constant. Some of these 'other things'
assumed constant are the costs of production, technology, government policy,
weather, the price of related goods, expectations, the goals of producers (do they
wish, for example, to maximise profits or sales), and so on. Now, we shall broadly
consider four of these non-price determinants.
Cost of Production
We have implied that producers are seeking to maximise their profits. Therefore,
any change in production costs will,
ceteris paribus
, affect the quantity supplied.
To illustrate this principle, return to
Table 5.1
. If unit production costs increase by
£1, and this additional cost cannot be passed on by suppliers, then they will supply
less to the market at each price. These changed conditions will cause the market to
shrink so that, for example, only 300 units per day would be supplied at a price of
£6 per unit.
In technical terms, what is happening is that the supply curve has shifted to the
left: less is now supplied at each and every price. The opposite would occur if one
or more of the inputs became cheaper. This might be the case if, say, technology
improves, but such opportunities seem slow to emerge in a construction industry
that is both labour intensive and culturally inclined to invest little in research,
development and training.
Government
In a similar way, taxes and subsidies also affect costs and thus supply. For example,
the landfill tax has increased construction costs and reduced supply at each price.
A subsidy would do the opposite, and increase supply at each price, since every
producer would be 'paid' a proportion of the cost of each unit produced by the
government. A more complicated issue is the impact of general taxation, as much of
the construction industry's demand is derived and depends on how others forecast
