9 DETERMINANTS OF SUPPLY

Supply is the number of goods and services that a supplier is willing, able and ready to sell in a market at a particular price and for a specific period.

Many factors influence supply, which is referred to as determinants of supply

Determinants of supply can be defined as factors that can affect or determine the supply of goods and services in a market.

The following are the factors that influence supply:

1. Price of the commodity: This has a direct impact on the number of goods supplied by a producer.

An increase in the price of a good increases the supplier's profit margin, which increases supply.

On the contrary, decreases in the price of goods discourage the producer from producing goods, resulting in a decrease in supply.

This is what is known as the law of supply,

2. Cost of production: The cost of producing a product has an impact on the supply of the same.

An increase in the cost of production affects a product's profitability, resulting in a reduction in supply.

It's also true in the other direction. A decrease in the cost of production raises the profitability of a product, increasing in the price of raw materials or changes in the wage rate can both affect the cost of production.

3. Changes in technology: When a company discovers new technology that enables it to produce more goods with the same inputs, the cost of production per unit of the commodity falls.

This would increase supply since more goods can be produced using the same inputs.

On the other hand, if a company uses obsolete technology to produce goods, supply will decrease as the cost of production per unit will increase.

4. Subsidy and tax: Subsidies and taxes have opposite effects on production costs.

Subsidy lowers the cost of production whereas tax raises the cost of production.

Since tax lowers the cost of production, it follows that a tax increase would reduce supply while a decrease in tax will increase supply.

The subsidy has the opposite effect. A higher subsidy encourages more production and hence increases supply, whereas a lower subsidy discourages producers and reduces supply.

The effect of subsidy and taxes can, therefore, be summarized as more tax, less supply; less tax, more supply; more subsidy; more supply; less subsidy; less supply

5. Price of related goods: Supply is also affected by the prices of related goods.

This is especially true if the firm can vary its input in the production of two or more goods.

Take, for example, a farmer that can produce two goods (rice and beans) from a piece of land.

If the price of rice increases so that the production of rice becomes more profitable, the farmer will divert land from the production of beans to the production of rice.

As a result, the supply of rice will increase while the supply of beans will decrease

On the other hand, if the price of rice decrease so that the production of rice becomes less profitable, the farmer will divert land from the production of rice to the production of beans.

As a result, the supply of beans increases while the supply of rice decreases

6. Future expectations of price: Changes in producer expectations of future prices can also affect the current supply in the market.

If producers expect prices to rise in the nearest future, they may withhold the current supplies of goods and services so that they can sell at higher prices later in the future.

This would result in a decrease in supply.

Conversely, when producers anticipate low prices in the future, they may increase current supplies to avoid selling at a lower price in the future.

This would increase the current supply.

7. Number of sellers in the market: Other things being equal, Increasing the number of sellers in the market will increase market supply.

Conversely, a reduction in the number of sellers in the market will reduce market supply.

To put it another way, as more firms enter the market, the market supply increases and as more firms leave the market, the market supply decreases.

8. Competition: Although the overall market supply increases as more firms enter the market, a new entry is not always beneficial to firms already in the market.

When a new firm enters a market, the existing producers lose market share, resulting in a decrease in supply.

The reverse is true when firms leave a market. As more firms exit a market, existing firms gain more market share as a result of reduced competition, thereby increasing supply.

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9. Natural conditions: The supply of some goods are affected by natural conditions such as floods, climatic condition etc.

For example, if a farmer's field is flooded and he is unable to plant enough of a specific crop, the supply will be reduced.

To summarize, we noted 9 determinants of supply which are:

  • price of the commodity
  • Cost of production
  • Change in technology.
  • Subsidy and tax
  • Price of related goods
  • The future expectation of prices
  • Number of sellers in the market.
  • Competition.
  • Natural conditions.

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