The Impact of Input Costs and Competition on Supply Decisions

This report examines the influence of input costs and perfect competition on supply decisions within the UK economy between 2010 and 2020. It begins by explaining how input costs, including land, labor, capital, and raw materials, affect production decisions and profitability, referencing the law of supply and demand. The report also discusses fixed and variable costs, average fixed and variable costs, and their impact on supply. Furthermore, it analyzes how factors like personnel costs, capital management, raw material allocation, and entrepreneurship influence manufacturing choices. The second part of the report defines perfect competition, emphasizing the role of price-taking producers and consumers, the importance of a large number of producers with small market shares, and the presence of standardized products. Finally, the report explains the supply curve in perfect competition, differentiating between short-run and long-run decision-making, highlighting the significance of costs, revenue, and shutdown points in determining profitability.

Economics for
business

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Why input and costs impact production decisions related to supply of goods and services. .1
Definition and explanation of perfect competition or highly competitive markets impact on
supply of goods and services..................................................................................................4
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Economics is defined as a social science which investigates production, distribution and
consumption of goods and services (Maresova and et. al., 2018). This report identifies the reason
behind the impact of input and costs on the production decisions related to supply chains in
context of the UK economy between 2010 and 2020. In addition to this, the impact of perfect
competition on supply of goods and services is explained in this report.
MAIN BODY
Why input and costs impact production decisions related to supply of goods and services
As per the law of supply and demand, if an economic commodity has high prices that the
demand from buyers will be low while the supply from buyers will be high. Similarly, if the
price of an economic good is low demand from buyers will be high while the supply from the
buyers will be low (Soelton and et. al., 2020). This is related to the decision making done for
supply of goods and services. The cost producing a specific commodity affects the price of the
commodity as producers aim to maximise profitability from each sale. Therefore, costs play an
important role in decision making of supply of goods and services as this element helps the
producers enhance profits. The law of supply and demand is depicted graphically below:
1

From the above graph it is determined that, the supply of specific commodity is directly
related to the product. This can be seen as the price reaches from P3 to P1, the increase is also
reflected in increase in supply of commodities. Low price of commodity leads to low supply of
products or services.
The production function refers to the relationship between quantity of input used and
quantity of output produced by the firm. The output produced by the firm dictates the level of
supply of goods and services (Arnott, Lizama and Song, 2017). The decisions made in context of
supply of goods and services are dependent on input. This includes both fixed input and variable
inputs. Fixed inputs as input whose quantity is fixed over period of time such as land while the
quantity of variable input changes with time such as labour. The quantity of output is dependent
on the quantity of variable input for specific quantity of fixed input. This showcases the relation
between input and the put-put produced. Thus decisions relation to the supply of products and
services are dependent on the quantity of variable input present at the company for specific
period of time.
There is also the concept of demising returns to an input. This refers to the decline in
marginal product of an input when the quantity of the input is increased keeping all other inputs
fixes. Marginal product of an input is defined as change in output gained from using additional
unite of the specific input assuming that the concepts of other inputs remain content. This
showcases that input affects the output produced and is considered a critical element in decision
making related to supply of goods and services.
The inputs which affect the quantity of output produced, and are considered during making
decisions related to controlling supply of gods and services are explained below:
 Land: This is an example of fixed input. From an economic point of view, land refers to
renewable and non-renewable resources along with sea oceans and rivers (Lipton and
Treccani, 2021). In case of short-run production this is considered a fixed input because it
provides the company capacity of constraint for sort-run production at a firm.
 Labour: This input is variable input in most industries. This input refers the intellectual
and corporeal actions conducted by the employees of the company for the production of
specific commodity. The amount of output produced by specific employee is the
measured labour of the employee. This is considered a variable cost in short-run
2

production because the quantity of this input can vary any time on the basis of the
productivity of the workforce of employees recently hired or terminated by the company.
 Capital: This is a commonly used example of fixed input (Susskind and Vines, 2020).
The amount of money available at the company is termed as the capital of the firm. It
includes machinery, equipment, production plants etc. This input remains fixed in the
short-run and defines the maximum output of the company. In this way the capital of the
company affects the supply of goods and services in short-run.
 Raw material: This is another example of variable costs. The material cost includes the
amount of raw material is purchased for producing specific quantity of goods or services.
This is variable input because it can be changed by the company at any point of time in
case of short run production.
Cost is defined as the amount of money paid by the company for various input used in
production. The total costs for specific quantity of output affects the decision making related to
supply of goods and services as it is used to increase profitability of the company. The total
costs for creating a specific quantity of output is the sum of fixed costs and variable cost of
producing the specific output. Fixed costs refer to the cost which is not dependent on the quantity
of output produced. It is also referred to as overhead costs and are the costs of fixed input.
Variable costs are defined as the costs that are dependent on the output produced. It is the costs
associated with variable input. Average fixed and Average variable costs are the cost per unit
output (Cox, Craig and Tourish, 2018).
As per the spreading effect large quantity of output increases the quantity of output over
which the fixed costs are spread which leads to lower average fixed costs. According to the
diminishing effect, larger quantity of output increases the amount of variable input needed to
produce additional units. This increases average variable costs. Business firms consider average
fixed and variable costs in decision making of supply of goods and services because controlling
these costs leads to higher profitability while also supplying adequate amount of goods and
services to the consumers. These costs are dependent on variable and fixed inputs, these factors
are also taken into consideration during production decision making.
Influence on manufacture choices
 Costs of Personnel: This variable input influenced as it is related to the current GDP
of the country. In case of UK, the rise in price of the products affects the Gross
3

domestic product of the country. During the recession in 2010, supply reduced
because of this.
 Capital: This fixed input plays an important role in economic growth of a country.
Ineffective decision making by the UK government in relation to mamnaging capital
and budget of the country hinders supply of goods and services and economic
prosperity of the region (Van Witteloostuijn, 2017).
 Raw material: This is variable input which also influenced decisions related to
supply of goods and services. Timely allocation of raw material is important for
smooth functioning of the economy. Supply chain disruptions caused by US china
trade war in the year 2018 delayed supply of raw materials. This negatively affected
economic growth of the country.
 Entrepreneurship: The decision making in context of supply of goods and services
is also influenced by entrepreneurship. In case of the UK economy, the change in
government in the year 2018 lead to satisfaction of various trade unions which
affected the supply of goods and services in the market.
Definition and explanation of perfect competition or highly competitive markets impact on
supply of goods and services
It is important to understand the concept of price taking producer in order to understand
perfect competition. A price taking producer refers to a producer who does not have the
ability to impact the market price of goods or services with actions or measures. This type of
producer looks at market price as given as the market price is remains unaffected by the
producer. On the other and a price taking consumer is defined as a consumer is defined as
consumer who does not impact the price of commodity purchased though their actions
(NUGROHO, HALIK and ARIF, 2020).
A simplistic definition of market with perfect competition is a market in which every
consumer and producer is a price taker. There are two conditions which need to be fulfilled
by market to become perfectly competitive. The first condition is that in order for an
industry to be competitive, it must have large number of producers with small market share.
The marker share of a producer in a perfectly competitive market is fraction of the total
industry output accounted for by the production of the specific manufacturer (Essentials of
Economics, 2020).
4

The scorned condition required for market to be perfectly competitive it is essential that
consumers consider each product to be of equal quality. In other words, a competitive
market deals in standardized products where consumers regard the product to be of same
quality even if it is from different brands. It is also referred to as commodity. In a perfectly
competitive market, standardized products are present in which consumers consider products
of different brands to be of the same quality (PRAMONO and et. al., 2021).
Apart from this, free entry and exit is another characteristic of perfectly competitive market
which is not an essential characteristic. This characteristic states that producers can easily
enter the industry and exiting producers can easily leave the industry. Therefore, it is
determining that a competitive market fulfils the two conditions. The first condition of
producer’s market share being fraction of market share of the company and the second
condition of presence of standardized goods. Most competitive market shares the
characteristic of free entry and exit, although it is not an essential characteristic.
Supply Curve in Perfect Competition
The supply curve depicts the relationship between price of a good and total production
output of the industry as a singular entity. The supply curve is created on the basis of key
terms of marginal revenues and cost indication. The two concepts provided in the supply
curve of perfect competition are explained below:
 Short-run decision making
In short run production one factor remains fixed whole other factor varies with passage of
time. In case of short-run production the main elements which affect decision making are
costs, revenue generated and process of shutting down the system. The supply curve in
perfectly competitive market of short run production consists of marginal costing curve line
being placed at or above the shutdown point (Alston, 2018). The graph provided below
depicts the supply curve in case of short run production.
5

From the above graph it is determined that in case of short-term production, in perfectly
competitive market the line depicting economic profit is placed above the shutting dotted
line. This leads to manufacturers attaining profitability. In case of the line is below the doted
shutting down line the manufacturers will not be able to attain high profitability. It is
determined from this graph that decision making in case of short run production is
dependent on the elements of costs revenue and shutdown costs and business firms need to
consider these elements in order to attain profitability.
 Lon-run production decision making: In case of ling run production every input
and costs factor is variable. This is because business firms are able change every
input and costs in order to seek high profitability (Klein, 2017). In a perfectly
competitive market, the process of calculation of supply is completed by adding a
sequences of short-run production curve shapes to gain the resultant curve for long
run production. The three cycles of efficiency which are part of the long run
production supply chain are provided below:
Increasing return to scale: In the early stages of production the supply curve moves downwards
where a proportional increase in resources leads to greater proportional increase in output of the
company.
Constant scaling return: This occurs when the long-run average total costs of the company
increase promotionally to increase in total output. This part of the supply curve the long run
average cost curve is flat as business firms experience constant returns to scale.
6

Decreasing return to scale: Here, market supply crave looks like a U, where a proportional
increase in resources leads to a smaller proportional increases in its amount to output.
It is determined from the above graph that; short term profitability of the company leads
to abnormal benefits of the firm. This is related to the condition of having low proficiency in
case of long-run production.
Industrial industry of UK
7

The UK manufacturing industry consists of diverse sets of industries which includes
small business firms along with large international corporations. UK is economically developed
country which has created a manufacturing industry consisting of firms from different sectors
such as food and beverage, automobile, technology and home appliances. In a perfectly
competitive industry the supply of products is dependent by the specific environment of the
competitive industry (Gálová, Rajnoha and Ondra, 2018). The impact of perfect competition on
supply of products in UK is provided explained below;
 Prices: The price of the product remain constant as both the buyers and producers
are price taking. This means that the actions of buyers and producers do not have
impact on the price of the products. An example of market price of product being
affected because of perfect competition in this way is IKEA. The company is retails
furniture in the UK the product offered by the company is ready to assemble
furniture in UK where the price of the product remains unchanged and the demand
for the products is equal to the total number of items produced.
 Number of sellers: In case of perfect competition the number of producers in the
industry is infinite. This is because different brands sell standardized products
which considered to be of equal quality by the market (ALAM, ALAM and
CHAVALI, 2020). In addition to this in a perfectly competitive market there is not
barrier to entry which affects the ability of the producers to determine suitable
quantity of product which neds to be supplies in the market. In this way the supply
of an item is impacted because of perfect competition. This situation harms the UK
economy.
 Competition: In a perfectly competitive market large number of competitors are
present. This means that every competitors has only small fraction of market share.
The large number of competitors present in the industry provide high quality goods
but sell them at low cost in order to earn profitability. This affects the supply of
products in the market.
8

CONCLUSION
From the above report it is concluded that input and costs play an important role in making
decisions related to supply of goods and services. In case of perfect competition, the supply of
goods is affected by the large number of competitors, free entry and exit from the market and
low price of the product. In addition to this the perception of the consumer that every product is
of same quality also affects supply of product in perfect competition.
9

REFERENCES
Books and Journals
Arnott, D., Lizama, F. and Song, Y., 2017. Patterns of business intelligence systems use in
organizations. Decision Support Systems, 97, pp.58-68.
Lipton, A. and Treccani, A., 2021. Blockchain and Distributed Ledgers: Mathematics,
Technology, and Economics. World Scientific.
Susskind, D. and Vines, D., 2020. The economics of the COVID-19 pandemic: an
assessment. Oxford Review of Economic Policy, 36(Supplement_1), pp.S1-S13.
Cox, A., Craig, R. and Tourish, D., 2018. Retraction statements and research malpractice in
economics. Research Policy, 47(5), pp.924-935.
Van Witteloostuijn, A., 2017. Interorganizational economics. The Blackwell companion to
organizations, pp.686-711.
NUGROHO, M., HALIK, A. and ARIF, D., 2020. Effect Of Camels Ratio On Indonesia
Banking Share Prices. The Journal of Asian Finance, Economics, and Business, 7(11),
pp.101-106.
PRAMONO, R and et. al., 2021. Determinants of the small and medium enterprises progress: A
case study of SME entrepreneurs in Manado, Indonesia. The Journal of Asian Finance,
Economics, and Business, 8(1), pp.881-889.
Alston, J.M., 2018. Reflections on agricultural R&D, productivity, and the data constraint:
unfinished business, unsettled issues. American Journal of Agricultural
Economics, 100(2), pp.392-413.
Klein, P.A., 2017. Economics: Allocation or valuation?. In The Economy as a System of
Power (pp. 9-36). Routledge.
Gálová, K., Rajnoha, R. and Ondra, P., 2018. The use of industrial lean management methods in
the economics practice: An empirical study of the production companies in the Czech
Republic. Polish Journal of Management Studies.
ALAM, M.N., ALAM, M.S. and CHAVALI, K., 2020. Stock market response during COVID-
19 lockdown period in India: An event study. The Journal of Asian Finance,
Economics, and Business, 7(7), pp.131-137.
Soelton, M and et. al., 2020, February. Self-esteem: the levels of religiosity in job insecurity and
stress in government company. In 4th International Conference on Management,
Economics and Business (ICMEB 2019) (pp. 302-310). Atlantis Press.
Maresova, P and et. al., 2018. Consequences of industry 4.0 in business and
economics. Economies, 6(3), p.46.
Online
Essentials of Economics, 2020. [online] Available through <
https://read.kortext.com/reader/epub/344475>
10