There are several important factors that are the determinants of the supply of a commodity. A change in any of these factors will largely result in a change in the supply of the commodity.
Determinants of Supply
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 or the amount to be payed 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 of 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 However, technological degradation or complex and outdated technology will increase the cost of production and will lead to decrease in supply.
5. Government Policy
The government’s taxation policy has effect on the quantity of commodity supplied. Increased taxes raise the cost of production thus reducing the supply of the commodity due to 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 do not maximize profits. The objective of such firms is to capture extensive markets and to enhance their status and brand name.
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 firms in the market
When the number of firms in the industry increases, market supply also increases due to 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 price 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 help in maintaining adequate supply of the commodity.