Draft Economics Essay
Explain the factors affecting supply in an economy and discuss the role of governments in
providing alternative market solutions when markets fail. (Use diagrams and contemporary
examples where possible).
1. Introduction
Balanced interactions of demand and supply in market economies provide efficient allocation
of goods and services. Supply refers to the quantity of a good or service which producers are
willing and able to produce at a given price and offer for sale in the market. The most
significant factors that affect supply of products in society are the cost of factors of
production, which are affected by the state of technological development, and the number of
firms in the industry performing similar main activities. However, markets are not always able
to serve their purpose perfectly, as market failure results in inefficient allocation of goods and
services, and in these instances, the government intervenes by providing alternative market
solutions.
2.1 Factors affecting supply: cost of factors of production
The main drive of supply in the economy is the producers’ strife to maximise profit from sale
of their output, as seen in the formula Profit = Total revenue – Total cost. Therefore, firms
seek to minimise their price of factors of production to maximise their return from the risk
taken in performing the entrepreneurial activity. Lower costs of inputs will enable the
producer to increase supply, whereas higher production costs will force producers to scale
back their operations, causing a shift to the right or to the left of the supply curve, as seen in
the diagram.
For instance, if the price of steel fell substantially, firms that use this metal to produce cars
would be able to increase their supply, as their inputs are now cheaper, and the supply curve
of cars would shift to the right.
Explain the factors affecting supply in an economy and discuss the role of governments in
providing alternative market solutions when markets fail. (Use diagrams and contemporary
examples where possible).
1. Introduction
Balanced interactions of demand and supply in market economies provide efficient allocation
of goods and services. Supply refers to the quantity of a good or service which producers are
willing and able to produce at a given price and offer for sale in the market. The most
significant factors that affect supply of products in society are the cost of factors of
production, which are affected by the state of technological development, and the number of
firms in the industry performing similar main activities. However, markets are not always able
to serve their purpose perfectly, as market failure results in inefficient allocation of goods and
services, and in these instances, the government intervenes by providing alternative market
solutions.
2.1 Factors affecting supply: cost of factors of production
The main drive of supply in the economy is the producers’ strife to maximise profit from sale
of their output, as seen in the formula Profit = Total revenue – Total cost. Therefore, firms
seek to minimise their price of factors of production to maximise their return from the risk
taken in performing the entrepreneurial activity. Lower costs of inputs will enable the
producer to increase supply, whereas higher production costs will force producers to scale
back their operations, causing a shift to the right or to the left of the supply curve, as seen in
the diagram.
For instance, if the price of steel fell substantially, firms that use this metal to produce cars
would be able to increase their supply, as their inputs are now cheaper, and the supply curve
of cars would shift to the right.
