Determinants of supply

Introduction

Supply is an economic principle defined as the quantity of a product that a seller is willing to give in the market at a specific price and within a certain time frame.

This article will help explain determinants of supply, such as price, cost of production, government legislation, and technology, and their impact on a product’s availability. Further, a product’s availability is controlled by the law of supply, which maintains that there is a direct relationship between a product’s supply and price while all other parameters remain constant.

Meaning and features of supply

In a market, the forces of demand and supply significantly influence consumer and producer choices.

Supply may be defined as a seller’s willingness to sell a specific quantity of a product at a specific price and time. It’s worth noting that demand refers to a buyer’s willingness, whereas supply refers to a supplier’s willingness.

• The term “supply” is always used to correspond to the cost of anything.
• Supply is always considered over a definite period.
• Supply considers the product’s stock and market price.

Law of supply

A core aspect of economic principles is the law of supply. It states that if all other factors remain constant, a price increase will boost the quantity supplied.

The rationale behind the law of supply

The basis for the positive relationship between price and quantity supplied is the possible improvement in profitability that comes with a price rise.

With everything else remaining unchanged, including production input costs, the provider will be able to raise his return per unit of a good or service when the item’s price rises. As a result, the gap between the price and the cost of the commodity or service being sold grows, so does the net return to the seller.

Market equilibrium

In combination with the law of demand, the law of supply creates the foundation for market circumstances, leading to price and quantity integration. It is also known as the equilibrium price and quantity, and it is graphically represented as the point where the demand and supply curves overlap or cross. It is the situation in the market where there is neither an excess nor a shortage.

What are the determinants of supply?

The following determinants of supply affect the decision making processes.

Techniques of production

The kind of production techniques utilised impacts the availability of commodities. Low output due to outdated processes further reduces the supply of commodities. Technological advancements assist in lowering production costs and increasing profit, resulting in increased supply.

Production costs

It is the expense undertaken to produce goods that will be supplied. The cost of production and the supply of goods is inversely proportional because profit maximisation is the primary purpose of most private businesses. Higher production costs reduce profit, limiting supply. Production costs are influenced by the cost of raw materials, wage rates, government licensing and taxation, and so on.

Type of economy

The institutional structure in which an industry works impacts the supply of goods. If a monopoly exists in the industry, the manufacturer may control the supply of their goods to boost prices and profits. The market supply tends to grow as more sellers enter the market.

A product’s cost

The price of a product is one of the most important drivers of its supply. While other parameters stay constant, an increase in the price of a product raises its supply and likewise. 

Future pricing expectations:

If producers foresee future prices to be higher, they will want to retain their supplies and sell the products later, allowing them to profit from the higher price. The greater the chance of profit, the higher the price of the good. As a result, the stronger the temptation to make more and sell it on the market.

Price of complementary goods

The prices of other items may influence the supply of a product, particularly if the commodities are complementary. A complementary good enhances the value of another or one that cannot exist without the other.

Complementary goods have a negative association, which indicates that when the price of product X rises, the demand for product Y decreases.

Suppose a company has the resources to produce multiple products. An increase in the price of other commodities encourages the firm to manufacture more of those goods to raise profits while producing fewer goods whose prices stay unchanged.

Government policies

Environmental and health restrictions, hour and wage legislation, taxes, electric and natural gas tariffs, and transportation and land use regulations are only a few examples of government policies and regulations. These rules can impact a product’s availability and thus, can be both a boost and a deterrent in determining the production.

Supply Function

It illustrates the interrelationship between a commodity’s supply and the factors that influence it. The following equation can effectively represent the supply function:

f = Sx (Px, PI, T, W, GP)

Where,

Sx = commodity x supply

Px = Commodity Price x

PI stands for “price of inputs.”

T stands for technology.

Weather conditions (W)

GP stands for Government Policy.

Supply curve

A supply curve is a graphical illustration of the correlation between the quantity of an item or service in supply and the price of the good or service over a given period. The supply curve is represented graphically with the price on the vertical axis and the number of items on the horizontal axis.

There is a shift in the supply curve with the change in the non-price determinants of supply. A few non-price determinants include cost and technology, the price of related goods, future expectations about prices, etc. On the other hand, the change in the quantity delivered is a result of a change in the product’s price.

A change in supply is indicated by a movement in the entire supply curve. A shift along the supply curve is caused by a change in the quantity delivered.

Conclusion

In reaction to a price change, producers will adjust their output levels throughout the supply curve such that they are equal to demand. However, other non-price factors can be determinants of supply influencing the production levels.