Question

Explain the determinants of supply?

Explain any one factor that affects the supply of a commodity.

Answer 1

Supply of a commodity depends on several factors. Important among them are discussed below.

1. Price of the Commodity: The price of a commodity is the most important determinant of its supply. The higher the price, the larger the supply. As the price rises, the producer, in the expectation of earning a larger profit, will increase the supply of the commodity and vice versa. The law of supply illustrates this type of relationship between price and supply.
2. Price of Other Commodities: When prices of all other commodities increase, it becomes more profitable for the producers to produce those commodities. Consequently, the supply of the existing commodity falls and vice versa. Thus, the supply of a commodity depends upon the prices of all other commodities.
3. Goals of the Firms: The supply of a commodity also depends upon the goals of firms. Their goals may be profit maximisation or sales maximisation. If their goal is to maximise profits, more quantity will be supplied at high price. But if the firms want to maximise their sales (as they think that increased supply is a source of status and prestige in the market), more quantity will be supplied even at the same price. Thus, change in the goals of the producers also influences the supply.
4. Prices of Factors of Production: The supply of a commodity is also influenced by the prices of factors used in its production. A fall in the price of factors of production will reduce the cost of production, which, in turn, will increase production and supply due to a rise in the margin of profits. If, on the other hand, the price of factors of production rises, supply will decrease due to a rise in costs and, hence, a fall in the margin of profits.
5. State of Technology: If the producers make use of improved and advanced technology in their process of production, the costs of production will come down. Total supply, thus, will increase. But against it, the supply of goods using old and inferior techniques of production will fall. That is why scientific discoveries and their applications to production of commodities are being made.