Determinants of Supply

DETERMINANTS OF SUPPLY
When price changes, quantity supplied will change. That is a movement along the
same supply curve. When factors other than price changes, supply curve will shift.
Here are some determinants of the supply curve.
1. Production cost:
Since most private companies’ goal is profit maximization. Higher production cost
will lower profit, thus hinder supply. Factors affecting production cost are: input
prices, wage rate, government regulation and taxes, etc.
2. Technology:
Technological improvements help reduce production cost and increase profit, thus
stimulate higher supply.
3. Number of sellers:
More sellers in the market increase the market supply.
4. Expectation for future prices:

If producers expect future price to be higher, they will try to hold on to their
inventories and offer the products to the buyers in the future, thus they can capture
the higher price.
Review:
A change in quantity supplied is caused by a change in its own price of the

good.
A change in supply is caused by a change in determinants.

Price
The price of the product is the starting point in building a model of supply. The supply
model assumes that price and quantity supplied are directly related.
Non-price factors
As well as price, there are several other underlying non-price determinants of supply,
including:
The availability of factors of production

The availability of factors of production, such as labour or raw materials, can affect the
amount that can be produced and supplied. For example, if a firm producing motor
vehicles experiences a shortage of steel for its body panels, then its ability to produce
vehicles will be reduced.
Cost of factors
Changes in costs will alter a firm’s calculation of how much to supply at a given price.
For example, if the same motor manufacturer experiences an increase in labour costs
due to an increase in the wage rate, the cost of producing each vehicle will rise. This
means that the price the manufacturer expects to receive will increase. If the price does
not increase, less will be produced, ceteris paribus.
New firms entering the market

In terms of total supply to a market, the number of firms in the market will affect the
total supply. New firms in a market will increase market supply and firms leaving will
reduce supply. New firms may be attracted into a market because of the expectation of
profits and existing firms may leave because they cannot cover their costs, and make
losses. They may also leave because they cannot cover their opportunity cost, meaning
that leaving becomes the best alternative.
Weather and other natural factors

Changes in the weather can have a considerable impact on the ability to produce certain
products, like farm produce and commodities. This tends to affect the primary sector
more than manufacturing.
Taxes on products
Taxes on products, such as Value Added Tax (VAT), have a direct effect on supply. An
indirect tax imposed on a product has an effect similar to that of a cos. which means
that increased taxes affect a producer’s decision to supply, and how much to supply.
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. Subsidies can alter the firm’s willingness and
ability to produce and supply.
Determinants of supply (also known as factors affecting supply) are the factors which
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 which are assumed to be
constant in law of supply.
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.
Number of Sellers
Greater the number of sellers, greater will be the quantity of a product or service
supplied in a market and vice versa. Thus increase in number of sellers will increase
supply and shift the supply curve rightwards whereas decrease in 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.
Prices of Resources
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,
increase in profits increases the supply and decrease in profits reduces the supply. In
other words supply is indirectly proportional to resource prices. Increase in resource
prices reduces the supply and the supply curve is shifted leftwards whereas decrease in
resource prices increases the supply and the supply curve is shifted rightwards.
Taxes and Subsidies

Taxes reduces profits, therefore increase in taxes reduce supply whereas decrease in
taxes increase supply. Subsidies reduce the burden of production costs on suppliers,
thus increasing the profits. Therefore increase in subsidies increase supply and decrease
in subsidies decrease supply.
Technology
Improvement in technology enables more efficient production of goods and services.
Thus reducing the production costs and increasing the profits. As a result supply is
increased and supply curve is shifted rightwards. Since technology in general rarely
deteriorates, therefore it is needless to say that deterioration of technology reduces
supply.
Suppliers' Expectations
Change in expectations of suppliers about 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 higher price thus reducing the supply. In case of manufacturers,
when they expect the future price to increase, they will employ more resources to
increase their output and this may increase current supply as well.
Prices of Related Products

Firms which are able to manufacture related products (such as air conditioners and
refrigerators) will the shift their production to a product the price of which increases
substantially related to other related product(s) thus causing a reduction of supply of
the products which were produced before. For example a firm which produces cricket
bats is usually able to manufacture hockey sticks as well. When the price of hockey sticks
increases, the firm will produce more hockey sticks and less cricket bats. As a result, the
supply of cricket bats will be reduced.
Prices of Joint Products

When two or more goods are produced in a joint process and the price of any of the
product increases, the supply of all the joint products will be increased and vice versa.
For example, increase in price of meat will increase the supply of leather.

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DETERMINANTS OF SUPPLY

4. Expectation for future prices:

A change in quantity supplied is caused by a change in its own price of the

A change in supply is caused by a change in determinants.

The availability of factors of production

New firms entering the market

Weather and other natural factors

Taxes and Subsidies

Prices of Related Products

Prices of Joint Products

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