• "Too many cooks spoil the broth" is a well-known phrase describing how too many people working in a limited space (a kitchen) end up ruining the food. Can you think how this relates to business?, "What if you owned a small coffee shop and wanted to increase your output following a large increase in demand, how would you cope?, what factors of production could you increase relatively quickly?"

• You should have realised that the majority of businesses CAN NOT SIMPLY INCREASE OUTPUT IMMEDIATELY, they NEED TIME to get more of the factors of production they need, such as LABOUR (Hire more workers) and CAPITAL (Move to a bigger shop), in other words some of the factors CANNOT BE CHANGED IMMEDIATELY and this period of time is called the SHORT-RUN.

"Why is this significant?"

• Well all supply curves are drawn under the assumption that at least one factor of production is FIXED and cannot be added too relatively quickly, and it is this assumption that creates the upward slope.

• THE LAW OF DIMINISHING MARGINAL RETURNS, states that in the SHORT-RUN, as more and more of a VARIABLE INPUT is added to FIXED INPUTS, the MARGINAL PRODUCT of the variable input, INITIALLY INCREASES (due to specialisation and/or division of labour etc), but will EVENTUALLY DIMINISH (FALL). LINK Let's look at an example using F1 pit stops! We can see that two mechanics are certainly better than one, and three is better than two, and so on until the most efficient number is reached, but what if they add more, thinking that will make them even faster????

If goals per game were the equivalent of output per worker, what can we conclude about the costs of each goal? For example Erling Haaland scored 2 goals per game

"What goes up must come down, and vice versa."

• As shown above, as output increases, the law of diminishing marginal returns starts to set in, causing both the average and marginal output levels to fall. In other words, when MP falls, it must mean PRODUCTIVITY FALLS. If we assume that factor costs are fixed (wages per worker), then if workers are less productive (low MP), each extra product is more and more expensive to make, so MC is rising, so both marginal and average costs start to rise; hence, the 'u-shape.'

• As shown above, in the short-run, MARGINAL COSTS eventually rise.

• A PROFIT-MAXIMISING producer will ALWAYS produce a unit AS LONG AS the PRICE they charge for it is HIGHER THAN THE MARGINAL COST of producing it (P>MC)

• Note that if a firm is UNABLE to get its MC BELOW THE PRICE (A HIGH-COST PRODUCER), then it will not be willing to supply anything and therefore will not be part of EFFECTIVE SUPPLY.

• This rising marginal cost means that eventually, it will rise to equal the chosen selling price (PRICE=MARGINAL COST) and A PROFIT-MAXIMISING PRODUCER will ALWAYS PRODUCE UP UNTIL THE  UNIT at which the MARGINAL COST = THE SELLING PRICE and NO MORE PROFIT CAN BE ADDED.

• THE HIGHER THE SELLING PRICE, the GREATER THE corresponding LEVEL OF OUTPUT at which PROFIT is MAXIIMISED and vice versa.

• Each price has a corresponding a profit maximising level of output, which enables us to derive a supply curve.

• We showed earlier that the supply curve is also the MC curve, therefore, IF COSTS INCREASE, the MARGINAL COST for each unit WILL ALSO INCREASE, shifting the MC curve up, which in turn means the profit-maximizing level of output will fall. 

• Below we can see in the diagram on the left, at P3 the profit-maximizing level of output was Q3, but after costs increase, it falls to Q2, which is the equivalent to a LEFTWARD SHIFT in the supply curve.

• A good that is SUPPLIED JOINTLY WITH ANOTHER GOOD is said to be in ‘JOINT SUPPLY’. According to the LAW OF SUPPLY, when the PRICE OF THE OTHER GOOD RISES, its QUANTITY SUPPLIED WILL ALSO RISE, and therefore there will be an INCREASE in the SUPPLY of its BY-PRODUCT, causing a RIGHTWARD SHIFT in its SUPPLY CURVE.

• A good that USES THE SAME (SCARCE) FACTOR OF PRODUCTION AS ANOTHER GOOD is said to be in ‘COMPETITIVE SUPPLY’. If the price of one of these goods rises then, according to the law of supply, more of it will be supplied, this will mean more of the shared FOP will go to that good leaving less for the other, decreasing its supply, and vice versa. 

• For example, HOUSING and FARMING both require LAND, therefore if the PRICE OF HOUSING RISES then according to THE LAW OF SUPPLY, MORE OF IT WILL BE SUPPLIED, ceteris paribus, this will mean land owners now use MORE LAND FOR HOUSING rather than farming. This will result in a DECREASE IN THE SUPPLY OF AGRICULTURAL PRODUCE, which is shown by a LEFTWARD SHIFT in the SUPPLY CURVE and vice versa. 

The IBDP Economics course requires you to write 3x 800-word INTERNAL ASSESSMENTS, requiring you to choose NEWS ARTICLES, to which you can apply economic theories and models. Below is an article related to the above concept of competitive supply. Your TASK is to firstly read it and make sure you understand its content, then do the following:

• Choose a related economic KEY CONCEPT. For this primer IA we will use the concept of 'CHOICE,' which "...relates to the act of selecting among alternatives due to scarcity, which inherently involves making trade-offs and incurring opportunity costs."

• "In economics, the concept of choice is inherently related to the concept of scarcity in that... as such, when producers respond to consumer demand related to 'What to produce?' they need to make choices about...in other words... competitive supply..." 

• Apply and Explain how this concept is occurring in the article below

• This concept(s) can be clearly illustrated in the article titled 'Green gold: Spanish farmers ditch olives for pistachios in bid to survive,' which was published in The Guardian newspaper in 2022. The article explains how farmers in Spain's Castilla-La Mancha region made the choice to...

• Use data and quotes from the article as much as possible to make this into a 'Commentary' on the article rather than a generic econ answer about competitive supply.

• "According to the text, farmers made this choice due to the following reasons...resulting in the demand for pistachios...."

• "A local farmer is quoted as saying..."

• Illustrate and explain concept with a correct and fully-labeled diagram.

• "...we can illustrate this choice to ditch olives for pistachios using the following demand and supply diagrams; we can see that as the demand for pistachios increased from D1 to D2...."

• If producers 'EXPECT' that FUTURE PRICES will RISE, they will likely REDUCE SUPPLY TODAY, so that they can supply and sell more in the future at the higher price.

• For example, many property developers in HK are slow to develop new apartment complexes as they know the longer they wait the higher the likely price of the apartments.

• EXPECTATIONS of A RISE IN PRICE => FALL IN SUPPLY 

• Conversely, If producers 'EXPECT' that FUTURE PRICES will FALL, they will likely INCREASE SUPPLY TODAY, so that they can supply and sell more at the higher price.

• For example, football shirts change their design every season, therefore, suppliers will expect prices to rise before the season begins and then fall as the season progresses and finally ends, hence supply will increase early and then fall.

• EXPECTATIONS of A FALL IN PRICE => RISE IN SUPPLY

• Given that the RATIONAL PRODUCER aims to SUPPLY THE GOODS AND SERVICES that CONSUMERS WANT, then clearly decisions about what to supply are often based on the tastes and preferences of consumers.

• For example, the recent 'Pop-it' trend and Liverpool tops