Microeconomics

Author: Guo Xibao
Publisher:
Publish Date: 2002-09-01
Features: Economic resources are always scarce and limited at any time, and society must use the resources it has efficiently. In fact, it is precisely because of scarcity and the desire for efficiency that economics has become an important and independent discipline.
Section 2: Supply of Goods and Supply Curve
1. Supply and Supply Function
The supply of a good refers to the quantity of that good that producers are willing and able to sell at a specific price level during a certain period, assuming other conditions remain unchanged. When considering the concept of supply, the following points should be noted:
First, supply refers to the quantity of goods that producers wish to sell, not the actual quantity sold;
Second, supply refers to the quantity of goods that producers are able to sell, meaning it is an effective supply; if there is only a desire to supply but no ability to do so, it cannot form an effective supply. Of course, even with the ability to supply but without the willingness to do so, actual supply cannot be formed. Therefore, supply requires both conditions to be met simultaneously.
The quantity supplied of a good is influenced by multiple factors. The main factors include: the price of the good, production costs, production technology, the prices of related goods, producers' expectations about the future, and other factors. In economics, it is customary to refer to changes in the quantity supplied caused by changes in the price of the good itself as "changes in quantity supplied," while changes in quantity supplied caused by factors other than price are referred to as "changes in supply."
The effects of factors other than the price of the good on the quantity supplied are as follows:
(1) Production Costs. Under constant prices, an increase in production costs reduces profits, thereby decreasing the quantity supplied. Conversely, a decrease in production costs increases profits, thereby increasing the quantity supplied. The level of production costs primarily depends on the prices of production factors or resources. When the price of production factors rises, the same production cost can produce fewer goods; when the price of production factors falls, the same production cost can produce more goods.
(2) Production Technology. Improvements, innovations, or major breakthroughs in production technology indicate increased efficiency, meaning fewer production factors are needed to produce the same amount of goods, or the same production factors can produce more goods. Under normal circumstances, given the prices of production factors, improvements in production technology can reduce production costs, increase producers' profits, and lead to an increase in the quantity supplied.
(3) Prices of Related Goods. The related goods referred to here are not limited to substitutes and complements but more broadly include goods that compete with the production of the good in question in terms of the input and use of production factors or resources. For example, the production of grain crops and cash crops both require land. When the price of cash crops rises, under constant conditions, the profit from using land to grow cash crops increases, while the opportunity cost of using land to grow grain crops rises. As a result, agricultural producers may reduce the area planted with grain crops, leading to a decrease in the supply of grain.
(4) Producers' Expectations for the Future. Producers usually have their own estimates and forecasts regarding future product prices, production costs, production technology, market demand, market competition, and other factors. Based on different expectations, producers adjust their current production scale to adapt to future markets. If producers have a positive outlook for the future, expecting prices to rise, they will expand production when formulating production plans, thereby increasing the quantity supplied. Conversely, if producers have a pessimistic outlook, expecting prices to fall, they will reduce production when formulating production plans, thereby decreasing the quantity supplied.
(5) Other Factors. In addition to the factors mentioned above that affect the quantity supplied, other factors include changes in the number of producers in the market, changes in producers' business objectives, changes in laws and government policies (such as legislation on environmental protection, workplace safety, minimum wages, government regulation, tax administration, etc.), and other factors. For specific industries, certain special factors may also affect the quantity supplied, such as climate conditions, which have a significant impact on agriculture and construction.
The supply function is an expression that represents the relationship between the quantity supplied of a good and the various factors that influence it. In other words, in the analysis above, the factors affecting the quantity supplied are independent variables, and the quantity supplied is the dependent variable. The quantity supplied of a good is a function of all factors that affect its supply. If we assume that other factors remain unchanged and only consider the effect of changes in the price of the good on its quantity supplied, i.e., treat the quantity supplied of the good as a function of its own price, then the supply function can be expressed as:
\[ Q = F(P) \]
where \( P \) represents the price of the good, and \( Q \) represents the quantity supplied.
2. Supply Schedule and Supply Curve
The supply function \( Q = F(P) \) shows a one-to-one correspondence between the quantity supplied of a good and its price. This functional relationship can be represented using a supply schedule and a supply curve.
A supply schedule presents the relationship between the price level of a good and its corresponding quantity supplied in tabular form, as shown in Table 2.2. From Table 2.2, it can be clearly seen that there is a functional relationship between the price of the good and the quantity supplied. For example, when the price of the good is 8 yuan, the quantity supplied is 70 units; when the price falls to 5 yuan, the quantity supplied decreases to 40 units; and when the price further falls to 2 yuan, the quantity supplied decreases to 10 units.
The supply curve is a line drawn on a plane coordinate graph based on the combinations of price and quantity supplied from the supply schedule. Figure 2.2 is a supply curve drawn based on Table 2.2. In Figure 2.2, the horizontal axis \( OQ \) represents the quantity of the good, and the vertical axis \( OP \) represents its price. On a plane coordinate graph, connecting the corresponding coordinate points A, B, C, D, E, F, G, and H obtained from each price-quantity combination in Table 2.2 in order forms the supply curve of the good, which represents the quantity of goods that producers are willing and able to offer for sale at different price levels.
The supply curve geometrically represents the correspondence between the price of the good and the quantity supplied. Like the demand curve, the supply curve is also a smooth and continuous curve, based on the assumption that changes in the price and corresponding quantity supplied are infinitely divisible. Similar to the demand curve, the supply curve can be linear or nonlinear. If the supply function is a linear function of the first degree, the corresponding supply curve is linear, as shown in Figure 2.2. If the supply function is nonlinear, the corresponding supply curve is curved. In microeconomic analysis, linear supply functions are used more frequently. The typical form of a linear supply function is:
Supply schedules and supply curves, based on the supply function, reflect the correspondence between changes in the price of a good and changes in the quantity supplied. From Table 2.2, it can be seen that the quantity supplied of the good increases as the price rises. Correspondingly, the supply curve in Figure 2.2 has a clear characteristic: it slopes upward to the right, meaning its slope is positive. Both indicate that there is a positive relationship between the price of the good and the quantity supplied, known as the law of supply. As for why the supply curve is generally upward sloping, or the specific reasons why the price of the good and the quantity supplied move in the same direction, will be discussed in Chapter 8 on the decision-making of output and price in a perfectly competitive market.
### Section 3: Equilibrium in the Market for Goods
Through the analysis above, we have learned that the demand curve shows how much consumers demand at each price level, and the supply curve shows how much producers supply at each price level. However, neither explains how the price of the good itself is determined. So, how is the price of the good determined? In microeconomics, the price of a good refers to its equilibrium price.
The equilibrium price of a good is formed under the interaction of the opposing forces of market demand and market supply.
1. Meaning of Equilibrium
In Western economics, equilibrium is a widely used important concept. The general meaning of equilibrium refers to a relatively stable state achieved by relevant variables in economic matters under certain conditions of interaction. Economic matters can be in such a stable state because, in this state, the forces of all participants in the economic matter can mutually restrain and offset each other, and because in this state, the desires of all aspects of the economic matter can be satisfied. For this reason, Western economists believe that the study of economics often lies in finding the equilibrium state where economic matters tend to stabilize under certain conditions.
In microeconomic analysis, market equilibrium can be divided into partial equilibrium and general equilibrium. Partial equilibrium analyzes the relationship between supply and price and the equilibrium state in individual or partial markets. General equilibrium analyzes the relationship between supply and price and the equilibrium state in all markets within an economy. General equilibrium assumes that the supply and prices of all goods are mutually influenced. A market equilibrium can only be achieved when all other markets are also in equilibrium.
2. Determination of Equilibrium Price
In Western economics, the equilibrium price of a good refers to the price at which the market demand for that good equals its market supply. At the equilibrium price level, the quantity supplied and demanded that are equal are called the equilibrium quantity. Geometrically, the equilibrium of a market for a good occurs at the intersection of its market demand curve and market supply curve, which is called the equilibrium point. The price and quantity supplied at the equilibrium point are respectively called the equilibrium price and equilibrium quantity. The state in which the quantity demanded and supplied in the market are equal is also known as the market-clearing state.
Now, combining the demand curve from Figure 2-1 and the supply curve from Figure 2.2, Figure 2-3 illustrates the determination of the equilibrium price of a good in a perfectly competitive market.