Demand and Supply are two pillars of business economics. We already know that demand is the quantity of a good or service that consumers are willing and able to purchase at different prices during a period of time. In this article, we will understand the meaning and determinants of supply.
What is Supply?
Supply refers to the amount of a good or service that the producers/providers are willing and able to offer to the market at various prices during a period of time. There are two important aspects of supply:
- Supply refers to what is offered for sale and not what is finally sold.
- Supply is a flow. Hence, it is a certain quantity per day or week or month, etc.
What are Determinants of Supply?
Determinants of supply (also known as factors affecting supply) are the factors that influence the quantity of a product or service supplied. The price of a product is a major factor affecting the willingness and ability to supply. Here we will discuss the determinants of supply other than price. These are the factors that are assumed to be constant in the law of supply.
A change in the price of a product causes the price-quantity combination to move along the supply curve. However, when the other determinants change, the supply curve is shifted.
The Law of Supply
The law of supply states that there is a positive relationship between price and quantity supplied, leading to an upward-sloping supply curve. Sellers like to make money, and higher prices mean more money!
For example, let’s say that fishermen notice the price of tuna rising. Because higher prices will make them more money, fishermen spend more time and effort catching tuna. As a result, as the price rises, the quantity of tuna supplied increases.
List of the Determinants of Supply
Below is a list of the major factors which can affect the supply of products:
- Price
- The number of sellers in the market
- The price of resources used to produce the product
- Tax rates and subsidies
- Improvements in technology and automation
- Expectations of the suppliers
- The price of related products
- The price of joint products made in the same process
#1. Price of the given commodity
The most important factor in determining the supply of a commodity is its price. As a general rule, the price of a commodity and the supply of the commodity are directly related. This means that as the price of the commodity increases, its supply will also increase and vice versa. This occurs as higher profits can be made at higher prices, therefore it compels the firm to offer a higher quantity of goods.
#2. Prices of Other goods
We know that resources have alternate uses. Therefore, the quantity of a commodity that is supplied depends not only on its price but also on the prices of other commodities. If the price of another commodity increases, it becomes more profitable than the given commodity. As a result, the firm shifts its limited resources to the production of other goods rather than the given commodity.
#3. Prices of factors of production
When the amount to be paid to the factors of production increases, the cost of production of the commodity also increases. As a result, the profitability of the commodity decreases, and thus the seller reduces the supply of the commodity. Similarly, if the prices of factors decrease, the profitability of the commodity increases, and the seller increases the supply of the commodity.
#4. State of Technology
The state or level of technology also influences the supply of the commodity in the market. Advanced technology allows the producer to produce the commodity at a lower cost of production thus increasing its profitability. As a result, the supply of the commodity is increased. However, technological degradation or complex and outdated technology will increase the cost of production and will lead to a decrease in supply.
#5. Government Policy
The government’s taxation policy has an effect on the quantity of commodities supplied. Increased taxes raise the cost of production thus reducing the supply of the commodity due to a lower profit margin. Whereas, tax concessions and subsidies cause an increase in the supply of the commodity as they make it more profitable for the firms to supply goods.
#6. Goals of the firm
Usually, the goal or objective of a firm is profit maximization and because of that, the supply of a commodity increases only at higher prices. But, with change in trend, some firms are willing to supply more at the same prices which does not maximize profits. The objective of such firms is to capture extensive markets and enhance their status and brand name.
#7. Number of Sellers
The greater the number of sellers, the greater will be the quantity of a product or service supplied in a market and vice versa. Thus increase in the number of sellers will increase supply and shift the supply curve rightwards whereas a decrease in the number of sellers will decrease the supply and shift the supply curve leftwards. For example, when more firms enter an industry, the number of sellers increases thus increasing the supply.
#8. Prices of Resources
An increase in resource prices increases the production costs thus shrinking profits and vice versa. Since profit is a major incentive for producers to supply goods and services, an increase in profits increases the supply and a decrease in profits reduce the supply. In other words, supply is indirectly proportional to resource prices. An increase in resource prices reduces the supply and the supply curve is shifted leftwards whereas a decrease in resource prices increases the supply and the supply curve is shifted rightwards.
#9. Suppliers’ Expectations
Change in expectations of suppliers about the future price of a product or service may affect their current supply. However, unlike other determinants of supply, the effect of suppliers’ expectations on supply is difficult to generalize. For example, when farmers suspect the future price of a crop to increase, they will withhold their agricultural produce to benefit from the higher price thus reducing the supply. In the case of manufacturers, when they expect the future price to increase, they will employ more resources to increase their output and this may increase the current supply as well.
#10. Prices of Joint Products
When two or more goods are produced in a joint process and the price of any of the products increases, the supply of all the joint products will be increased and vice versa. For example, an increase in the price of meat will increase the supply of leather.
#11. Labor Rates
Similarly, when wage rates rise, the marginal cost of any business that employs labor also rises, shifting supply curves to the left (or, equivalently, upward). When interest rates fall, the opportunity cost of capital equipment also falls, causing supply to shift to the right.
The perfectly competitive firm faces a horizontal demand curve for its product, meaning that it can sell any quantity it wishes at the market price. In the short run, the firm’s goal is to choose the level of output that maximizes its profits. It will accomplish this by choosing the output level for which its marginal cost is equal to the market price of its product, provided that price exceeds the average variable cost.
#12. Subsidies
Subsidies are funds given to firms to enable them to increase their supply or to reduce the price of their product to the consumer. They can alter the firm’s willingness and ability to produce and supply.
Determinants of Supply Example
Assuming an agriculturist who ventures into crop farming works for seven years by manual cropping techniques. For the period mentioned it is obvious that if all things remain equal, the quantity produced and supplied to a market would remain the same.
If for a given year the agriculturist has an encounter with the government which could give him support by providing machinery to practice mechanized farming, that implies effort will be reduced, size of human labor reduced and if more lands are acquired, then on the eighth year the man is likely to produce more than the formal quantity of goods for sale. This suggests that supply is affected by a determinant factor – technology replacing manual means.
Determinants of Supply Analysis
A good point to note about supply is that a “change in supply” refers to a shift in the entire supply curve, as opposed to a movement along the curve, which could be referred to as a “change in the quantity supplied.” A seller will offer more units if the benefit of selling extra output increases relative to the cost of producing it. And since the benefit of selling output in a perfectly competitive market is a fixed market price that is beyond the seller’s control, one concern about the determinants of supply that influence supply naturally focuses on the cost side of the calculation. The preceding instances suggest that the following factors, among others, will affect the likelihood that a product will satisfy the cost-benefit test for a given supplier.
Determinants of Market supply
The determinants of supply given above apply to both individual and market supply. Apart from the determinants of supply given above, market supply has some other factors determining the quantity of commodity supplied.
#1. Number of the firms in the market
When the number of firms in the industry increases, market supply also increases due to a large number of producers producing that commodity. However, market supply will decrease if some of the producers start leaving due to losses.
#2. Future expectations regarding price
If sellers expect a rise in the near future, the current market supply will decrease so that the supply can be increased when the prices are high. On the other hand, if the sellers fear that the price will fall in the near future, they will increase the supply of the commodity to avoid losses in the future.
#3. Means of transportation and communication
Proper infrastructural development like improvement in the means of transportation and communication helps in maintaining an adequate supply of the commodity.
Non-Price Determinants of Demand
The following list enumerates the non-price determinants of demand. These factors are important because they can change the number of units sold of products and services, irrespective of their prices. The determinants are noted below. These determinants will alter the demand for goods and services, but only within certain acceptable price ranges. For example, if non-price determinants are driving increased demand, but prices are very high, it is likely that buyers will be driven to look at substitute products.
#1. Branding
Sellers can use advertising, product differentiation, product quality, customer service, and so forth to create such strong brand images that buyers have a strong preference for their goods.
#2. Market Size
If the market is expanding rapidly, customers may be compelled to purchase based on other factors than price, simply because the supply of goods is not keeping up with demand.
#3. Demographics
A change in the proportions of the population in different age ranges can alter demand in favor of those groups increasing in size (and vice versa). Thus, an aging population will increase the demand for arthritis drugs, while a younger population will increase the demand for sporting goods.
#4. Seasonality
The need for goods varies by time of year; thus, there is a strong demand for lawn mowers in the Spring, but not in the Fall.
#5. Available Income
If the amount of available buyer income changes, it alters their propensity to purchase. Thus, if there is an economic boom, someone is more likely to buy, irrespective of price.
#6. Complementary Goods
If there is a price change in a complimentary item, it can impact the demand for a product. Thus, a change in the price of popcorn in a movie theater could impact the demand for movies, as could the price of nearby parking.
#7. Future Expectations
If buyers believe that the market will change in the future, such as may happen with an anticipated constriction of supplies, this may alter their purchasing behavior now. Thus, an expected constriction in the supply of rubber might increase the demand for tires now.
Conclusion
Supply is the quantity of commodity a seller is willing to sell at some price over a certain period. Factors that influence the supply of goods and services are termed determinants of supply. Some of the determinants of supply are technology, the number of suppliers, expectation of suppliers, feedback from consumers, increase in tax, high wage rate, etc. The change in prices of other products which a producer can produce may cause a change in supply for the product.
Determinants of Supply FAQs
What is the law of supply?
The law of supply is a microeconomic law that holds that all else being equal when the price of an item or service rises, so will the amount of goods or services offered by suppliers, and vice versa.
How is supply determined?
Price, which increases or decreases supply along the price curve, and non-price factors, which move the entire curve, dictate supply levels.
What is supply function?
The supply function is the mathematical statement of the link between supply and the factors that influence a supplier’s willingness and capacity to sell items. The curve suggested by where is the price of the good and is the price of a related good is one example.
