Introduction to Business and Economics. Bettina Fuhrmann

shape of the supply curve can also be explained by the concept of increasing marginal costs faced by many industries and businesses. Marginal cost is the cost of producing an additional unit of a good or by providing an additional unit of a service. As output increases and exceeds a certain level it will become more and more costly to produce; businesses need to build higher capacities (machinery, personnel) so marginal costs would rise. Only if the price level increases and exceeds (or at least equals) marginal costs would businesses be willing to produce and supply a higher amount.

Figure 2. The supply curve (price in euros, quantity in 1,000 hours)

      [14]Figure 2 shows the relationship between prices and supply in the market for computer support services (e.g. within a country).

       2.6.2 The law of demand

      Demand, on the other hand, is the quantity of a good or service that customers are willing and able to buy. Usually the higher the price is, the lower demand will be. The more Tina and Steve as well as other providers charge for their technical computer support service per hour, the more demand will decrease (because more and more people cannot afford such high prices or are not willing to pay such high prices for that service and will instead look for other ways to get help with their computer problems). People’s willingness to pay a certain price is related to the utility or the level of satisfaction the people get from consuming the service. Figure 3 gives you an idea of how many hours of technical support would be demanded in the market, depending on the price.

Figure 3. The demand curve (price in euros, quantity in 1,0 hours)

      The graph in figure 3 shows that the quantity demanded decreases as the price rises. Accordingly, the quantity demanded (the quantity that people are willing and able to buy) increases as the price falls. Therefore, the quantity demanded is negatively or inversely related to the price. All other things equal (“ceteris paribus”), this relationship can be found with almost all goods and services in the economy, so that it is also called the law of demand.

       2.6.3 The market equilibrium

      If we have a look at both curves, we can see that they intersect at a certain point, at the price of 150 euros. At this point, the quantity of hours that is demanded in the market equals the quantity of hours that is supplied.

      Assuming that these curves represent supply and demand in the whole market for computer support services, this price would also be called the market price or equilibrium price (because supply equals demand). At the price of 150 euros per hour demand and supply balance each other out. As the quantity supplied equals the quantity demanded, there is neither a surplus (higher supply than demand) nor a shortage (higher demand than supply). At a higher price, demand would be lower than supply and vice versa.

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      Figure 4. Supply and demand intersect at the market price (price in euros, quantity in 1,000 hours)

      In the real world, other factors than price also affect demand and supply.

       Demand is also affected by:

      ■ Changes in income: If income increases, people can afford more (and more expensive) computer services and – all other things held constant – demand would increase (so the demand curve would shift to the right). Similarly, if income decreased, people would not be able to spend so much money on technical support anymore, and consequently, demand would decrease (and the demand curve would shift to the left).

      ■ Changes in consumer preferences: More and more people might want to have additional technical support, so demand would increase. In a different scenario, people could possibly like to have new and faster computers, so demand for used computers would decrease (regardless of the price).

      ■ Complementary goods: If an additional service is offered that is related to the computer support service and that people are highly interested in, demand for computer services would be very likely to increase.

      ■ The availability of substitute goods: If people found a service that perfectly substitutes computer support services, the demand for computer support service offers would also decrease. This effect will also be discussed in chapter 5, Marketing.

       Supply is also affected by:

      ■ Number of suppliers: The more profitable a market is considered to be, the more suppliers will enter this market. As the number of suppliers increases, supply will increase (the supply curve would shift to the right), until supply is so high that prices fall again and no more additional suppliers enter the market.

      ■ Technological changes: These might enable more people to provide computer services and enter the market.

      ■ Changes in resource prices: If the costs for offering the service decreased but prices for the services stayed the same, more providers would be willing to enter the market.

      ■ Price expectations: If providers think that prices in the computer market could fall, they will probably think of some other field of business to work in and reduce their supply in their original field of business.

       [16] Supply and demand for money

      Please note that the laws of supply and demand also help to understand one of the main causes of inflation. If the quantity of money within a country is increased (in order to stimulate the economy), people and businesses are able to buy more and to invest, so demand for goods and services usually rises. If the quantity of available goods and services in this country remains the same and does not increase accordingly, then the prices for goods and services will rise. “Too many dollars chasing too few goods” expresses very well what inflation is about. It is by increasing the price for money, i.e. the interest rates, that inflation can be fought. If it is more expensive to borrow money, people and businesses tend to spend less, demand for goods and services decreases again and so do their prices.

2.7 Competition in the market

      The level of competition in a market is mainly influenced by the number of suppliers and the availability of substitute goods. If there is just one supplier, the market situation is called a monopoly. Monopolies are rare in a market economy but there might be goods and services that are only provided by one business (like the railway in some countries).

      Some businesses might not be the sole suppliers in the whole market, but they might be the only supplier within a certain area, which also makes them a kind of monopolist. The owners of a ski hut might be in a monopoly-like situation if they are the only ones to offer food and beverages on a particular mountain. A theatre bar is in a similar situation. Tina and Steve could find themselves in such a situation if they are the only ones that offer such a service within a radius of 50 km for example.

      If there are a few suppliers, the market form is called an oligopoly. Each supplier has a relatively large share of the market (e.g. telecom companies, car manufacturers). Competition can be strong, because as soon as one supplier changes the product or the price, its competitors are very likely to react in order to maintain their share of the market. Alternatively, suppliers could try to negotiate their terms of sale in order to prevent such harmful competition. Such agreements – also called a cartel – are usually not considered legal. In general, laws support competition in a market because