Question

Explain the determinants of supply.

What are the determinants of supply?

Answer 1

Supply refers to the quantity of a commodity that a seller is willing and able to offer for sale at a given price during a certain period of time.

The following are the determinants of supply:

1. Price of commodity: Other things remain constant; at higher prices, the producers prefer to increase their sales by increasing their supply and vice-versa. Thus, there is a direct relationship between price and quantity supplied.
2. Price of related goods: A rise in the prices of substitute goods will lead to a decrease in the supply of other goods and vice-versa. On the other hand, a rise in the price of complementary goods will lead to an increase in the supply of other goods.
3. Cost of production: If the price of inputs increases, the cost of production also increases, with other things remaining the same. An increase in the cost of production decreases the profits of the supplier, and consequently, a lesser quantity is supplied at the given price.
4. State of technology: Other things remain the same; if the level of available technology appreciates, the per unit cost of production goes down, which implies a higher supply of output and vice-versa.
5. Government policy: Favourable Government policies may encourage supply, and unfavourable government policies may discourage supply. Government policies like taxation, subsidies, industrial policies, etc., may encourage or discourage production and supply, depending upon government policy measures.
6. Natural factors: Other things remain the same in the event of any natural calamity, such as an earthquake, flood, etc., the supply of output will fall.
7. Future expectations about price: If the prices are expected to rise in the near future, the producer may withhold the stock. This will reduce the supply and vice-versa.