Individual Supply and Market Supply of Jeans

P 1

0 Q 1 Q 2 Q

Figure 2.11: Horizontal supply curve

2.2.2. Individual supply and market supply

- Individual supply: the supply of each producer for a good or service is the individual supply of that good or service.

- Market supply: the market supply of a good or service is the sum of the individual supplies of that good or service.

For example: Assuming other factors remain unchanged, there are 4 businesses participating in supplying jeans to the market but with different levels of price acceptance. We have the following supply schedule:

Table 2.5: Individual supply and market supply of jeans

Jeans products

(1,000 VND)

Supply (units)				Total supply of the market
DN1	DN 2	DN 3	DN4	Total supply of the market
100	10	50	0	0	60
125	30	100	0	0	130
150	60	150	10	0	220
175	90	200	20	0	310
200	120	250	30	20	420
225	150	300	40	40	530
250	180	350	50	60	640

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Based on the principle of calculating market supply from the sum of individual supplies; we will construct the market supply of a certain commodity with only 2 individuals existing in the market, the result of constructing the market supply curve through the following graph:

S 2

P 2

P 1

0 Q 1 Q 2 Q 3 Q

Figure 2.12: Constructing the market supply curve

2.2.3. Law of supply

When the price of a good increases, the supply of that good increases and vice versa, provided that the factors affecting supply remain unchanged.

Here the question arises: Why does a higher price lead to a higher quantity supplied? The answer is profits. If the prices of the inputs used to produce goods are kept constant, then when the price of the goods increases, the revenue of the business will increase which means higher profits than before. They will then produce more goods and services and will attract more businesses to produce.

Q  when P  (When other factors remain constant) Q  when P  (When other factors remain constant)

For example, when pork prices increase, it will encourage farmers to raise more pigs under the condition that the factors affecting it remain unchanged: animal feed prices, government policies...

2.2.4. Factors affecting supply formation

Before considering a specific factor, let's review the factors that affect supply: the price of the goods themselves, production technology, prices of input factors, tax policies, number of producers, and expectations.

- Price of the goods sold (P X )

According to the law of supply: when the price of a good or service sold increases, the quantity of goods or services supplied in the market increases under the condition that other factors remain constant.

Price is a determinant of quantity supplied. A high price of a good or service makes it profitable to sell and therefore the quantity supplied is large. As a producer of that good you will work more, buy more machinery and hire more workers. Conversely, when the price of the good or service is low your business is less profitable and you produce less of the good. When the price is even lower you may decide to go out of business altogether and your quantity supplied drops to zero.

For example: When the price of bread increases while other factors affecting the supply of bread remain unchanged, selling bread will be profitable, so manufacturers will produce more, and the supply of bread will increase.

- Production technology (C)

The technology used to transform inputs into outputs is another determinant of supply. It has a direct impact on the quantity of goods produced. The more advanced the production technology, the lower the input costs, saving time and resources. Therefore, labor productivity increases, more goods are produced, so the supply curve shifts to the right (quantity supplied increases) because producers are able to supply more at each price, so profits also increase.

For example: To sew a shirt. If you sew by hand, it takes 8 hours to finish, but if you do it by machine, it only takes 2 hours, so you can save 6 hours to sew 3 more shirts.

- Price of input factors (P i )

The prices of inputs directly affect the cost of production and therefore the quantity of goods that firms want to sell. If the prices of inputs decrease, the cost of production will decrease and therefore firms will want to supply more because profits will be higher. When the prices of inputs increase, the cost of production will increase so this production is less profitable. When the prices of inputs increase sharply, you may decide to close down the business and no longer supply the product because at this point the profit is zero or less than zero (ie a loss).

- Number of producers (N S )

The number of producers has a direct impact on the quantity of goods sold in the market. The more producers, the more goods sold in the market and vice versa, when there are fewer producers, the quantity of goods sold in the market also decreases.

- State policy (T)

+ Financial policy: taxes and interest. This government policy has an important influence on the firm's production decisions, thus affecting the supply of products. High tax and interest rates will make the remaining income of producers

output will decrease because for producers taxes and interest are costs so they will not want to supply goods anymore, and conversely low taxes and interest will encourage firms to expand their production.

For example: US income tax during World War II was 94%, after 1965 it was 70%, until President Bill Clinton: reduced to 40%). In Vietnam, people with income from 5 million VND/month to 15 million VND/month must pay a tax rate of 10%, the tax payable = 0 + 10% of income exceeding 5 million VND, 15 - 25 million VND the tax rate is 20%, from 25 - 40 million VND the tax rate is 30%, over 40 million VND the tax rate is 40% and the tax payable is calculated similarly in the case of income from 5 - 15 million VND.

+ Subsidies or tax exemptions: this is a government policy to encourage manufacturers to expand production scale, thereby increasing the supply of goods or services and shifting the supply curve to the right (increasing supply).

+ State policies on society and environment: State regulations on social and environmental issues often impose costs on businesses, businesses will have to limit the use of resources... leading to a decrease in the supply of goods on the market, the supply curve shifts to the left (reduced supply).

- Expectations (E)

Expectations about changes in commodity prices, prices of factors of production, and tax policies all affect the supply of goods. If expectations are favorable for producers, supply will expand and vice versa, if expectations are unfavorable for production, supply will contract and quantity supplied will decrease.

Thus, we can summarize the factors affecting supply in mathematical form as follows:

Q SX = f(P X , C, P i N, T, E....) (2.2)

In there:

Q SX : Quantity supplied of goods XP x : Price of goods X

C: Technology

P i : Price of inputs N: Number of producers

T: Government policy E: Expectations

Note : The supply of goods X is affected by the total impact of all the factors that determine it, but in reality, to conveniently analyze the impact of each factor on the supply of goods and services, people often assume that other factors remain unchanged.

Supply function at price

In the functional relationship, quantity supplied and price can be represented through the equation: Q S = f(P)

In which: Q S : Supply of goods and services under consideration.

P: Is the price of the commodity under consideration.

The common supply function is the linear supply function, which has the form: Q S = cP + d In which: Q S : Is the quantity supplied.

P: Is the price of goods.

a: Coefficient showing the relationship between price and quantity supplied. b: Coefficient showing quantity supplied when price is 0.

Inverse supply function (another way of writing supply function):

P 1 Q d

S cc

Let: 1/c = c' and -d/c = d'

We can rewrite the inverse demand function as: P S = c'.P + d'

The supply functions established above are limited to the condition that other factors remain unchanged, the function only shows the correlation between price and quantity supplied of the goods and services under consideration.

The coefficient c or c' usually takes a positive value to refer to the general case of the supply curve, which is to show a proportional relationship between price and quantity supplied.

2.2.5. Movement and shift of the supply curve

2.2.5.1. Movement of the supply curve

When other factors are fixed (input prices, production technology, production scale, policies, expectations), a decrease in the price of a good leads to a decrease in the supply of that good (law of supply), at which point there is a movement along the specific supply curve sliding from top to bottom (from point A to point C).

P B

P A A

P C

When the selling price of a good increases, the supply of that good increases (law of supply), at this time there is a movement along the supply curve from bottom to top, specifically from point A to point B. Described in Figure 2.13.

OQ C Q A Q B Q

Figure 2.13: Movement of the supply curve

2.2.5.2. Shift in supply curve

When the price of a good changes, it moves along the supply curve. What about changes in other factors? Consider the following example:

For example, suppose the price of sugar falls. How does this change affect the supply of ice cream? Since sugar is an input to ice cream production, a fall in its price will reduce the cost of the input, making it profitable to sell a larger quantity of ice cream. This will increase the supply of ice cream: at any given price, sellers are now willing to produce a larger quantity of ice cream, so the quantity supplied will increase. This will shift the supply curve to the right, and conversely, if the price of sugar rises (when the price is constant), the profit from selling ice cream will decrease, and producers will automatically cut back on production, reducing the quantity supplied, shifting the supply curve to the left.

S 2

S 1

0 Q

Figure 2.14: Shift of the supply curve

From that specific example we can conclude:

- Any change that increases the quantity that sellers want to produce at a given price shifts the supply curve to the right (from S to S 1 ).

- Any change that reduces the quantity a seller is willing to produce at a

A given price also shifts the supply curve to the left (from S to S 2 ).

From the above analysis we have the following summary table:

Table 2.6: Movement and shift of supply curve

Variables affecting

supply

Change in this variable
Price	Represents movement along the supply curve
Input price	Shift the supply curve
Technology	Shift the supply curve
Expected	Shift the supply curve
Number of sellers	Shift the supply curve

In short, the supply curve tells us what happens to the quantity supplied when the price of a good changes, holding other things constant. When any of the factors other than price change, the supply curve shifts.

2.3. SUPPLY - DEMAND BALANCE

2.3.1. Equilibrium state

Assuming that the activities of producers and consumers are independent of each other, producers will operate according to the law of supply. That is, when prices increase, they sell more, when prices decrease, they sell less and they always want to sell at a high price. As for consumers, they operate according to the law of demand, that is, when the number of goods and services increases, they will buy less and vice versa, they always want to buy cheaply. Therefore, producers and consumers are always in opposition to each other and this is resolved when at the market equilibrium point E, the quantity supplied by producers (Q S ) is equal to the quantity demanded by consumers (Q D ).

- Equilibrium is the state where total supply equals total demand.

goods and services. Here, producers sell all their goods and consumers buy enough goods to meet their consumption needs. If shown on the graph, this is the intersection point between the demand curve and the supply curve. That is the equilibrium point of the market E (including equilibrium price and quantity).

- From the equilibrium state (equilibrium point), we can determine the equilibrium price and quantity in the market. This is the mechanism for forming the market price of goods and services. That means, in the free market mechanism, the price of goods and services is formed first of all by the supply and demand relationship of those goods and services.

- In market equilibrium, the distribution, exploitation and use of resources are effective, adequately distributing benefits among producers, consumers and society.

For example: There is a statistical table on the supply and demand of CR203 rice variety in a locality A during the 2001 crop season.

Table 2.7: Demand and supply relationship of CR203 rice variety in district A, 2001 crop season

P (million VND/ton)

2	3	4	5
Q D (ton/day)	50	40	30	20
Q S (ton/day)	30	40	50	60
Supply and demand relationship	Deficiency	Balance	Redundant	Redundant

On the graph below (Figure 2.15), we see that point E is the equilibrium point. From point E, we find the equilibrium price (P E = 3 million VND/ton) and equilibrium quantity (Q E = 40 tons/day).

PE = 3

0 Q E = 40 Q

Figure 2.15: Supply and demand equilibrium in the market

2.3.2. Surplus and deficit states

There are two reasons for the imbalance between supply and demand:

- If supply is greater than demand, it leads to a surplus of goods and services in the market (shown on the graph). This is a state of oversupply and there is always pressure on the market to reduce prices from sellers.

For example: When the price is 5 million VND/ton, Q D = 20 tons/day, Qs = 60 tons/day, leading to a surplus of 40 tons/day and causing the market to have pressure to reduce prices (reflected in Figure 2.16).

Surplus of goods

Q 1

Q E

Q 2

P 1

P E

Figure 2.16: Excess (oversupply) state in the market

- If demand is greater than supply, it leads to a shortage of goods and services in the market. This is a situation of excess demand and there is always pressure on the market to increase prices from buyers.

For example: When the price is 2 million VND/ton, Q D = 50 tons/day, Qs = 30 tons/day, leading to a shortage of 20 tons/day and causing the market to have pressure to increase prices (reflected on the chart).

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