What are Determinants of Supply?

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Determinants of supply are the factors that can causes changes to, or affect, the supply of a product in the market.

There are a number of factors that can affect, influence and determine supply, and they tend to define the state, nature and trend of supply over time. They serve as the bedrocks that limit what sellers make available in the market at a certain price and quantity.

One of the principal factors that affect supply is the price of products in the market. Thus the law of supply will say that producers offer more products for sale when its price increases.

Other major determinants of supply are changes in raw materials such as labor, other inputs used in the production of a good or service, improvement in technology that reduces the cost of producing the good and service, an improvement in weather (especially for agricultural products), an increase in the number of suppliers, an expectation of lower price in the future and many other factors to be discussed.

List of 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

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 “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.

Predicted Variations

Expectations about future price changes can affect how much sellers choose to offer in the current market. Suppose, for example, that a soap producer expects the future price of its product to be much higher than the current price because of the growing use of its resources. The rational producer would then have an incentive to withhold some of his products from the market at today’s lower price, so as to have more available to sell at a higher price in the future.

Price Variation

Variation in the prices of other goods and services that sellers might produce is another significant factor. Prospectors, for example, will search for those precious metals for which the surplus of benefits over costs is greatest. When the price of silver rises, many will stop looking for gold and start looking for silver. Mining silver at the current price is now more profitable than gold. This shift will affect the supply of gold in the market.

Technology Costs

 One of the most important determinants of production cost is technology. Improvements in technology make it possible to produce additional units of output at a lower cost. This shifts each individual supply curve downward (or, equivalently, to the right) and hence shifts the market supply curve downward as well. Over time, the introduction of more sophisticated machinery has resulted in dramatic increases in the number of goods produced per hour of effort expended. Every such development gives rise to a rightward shift in the market supply curve. But how do we know technological change will reduce the cost of producing goods and services? What if the new equipment is so expensive that producers who use it will have higher costs than those who rely on earlier designs? If so, then rational producers simply would not use the new equipment. The only technological changes that rational producers will adopt are those that will reduce their cost of production.

Whereas technological change generally (although not always) leads to gradual shifts in supply, changes in the prices of important inputs can give rise to large supply shifts literally overnight. For example, the price of crude oil, which is the most important input in the production of gasoline, often fluctuates sharply, and the resulting shifts in supply cause gasoline prices to exhibit corresponding fluctuations.

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.

Determinants of Supply 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 determinant 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.