Question

What are the factors on which the supply of a commodity depends? Discuss them briefly.

Explain how the following factors affect the supply of a commodity:

1. State of technology
2. Price of factors of production
3. Goals of the firm
4. Future price expectation

Explain any five determinants of supply.

Explain two factors affecting supply other than price.

Answer 1

Five Determinants of Supply

The supply of a commodity is determined by the following factors.

1. Price of the commodity: The most important determinant of supply of a commodity is its price. Higher the price of the commodity, the producer will offer more quantities for sale in the market and vice-versa.
2. Prices of inputs: The supply of a commodity is affected by change in prices of inputs used in the production of the good. If the prices of inputs rise, the cost of production will rise and as a result the supply of the commodity falls. On the other hand, if the prices of inputs fall, cost of production declines and as a result the supply of the commodity increases.
3. Prices of other goods: The supply of a commodity also depends upon the prices of other goods. Suppose if the price of good y rises, it will be more profitable to produce that good, and the supply of given good say X would fall.
4. State of technology: The supply of a commodity also depends on the production technology used by the producer. If there is an improvement in the production technology, the cost of production declines. As a result profits tend to increase. This leads to increase in supply.
5. Goals of firm: If goal of the firm is to maximise profits; more quantity will be supplied at high price. But if the firms want to maximise their sale (as they think that increased supply is a source of status and prestige in the market), more quantity will be supplied at lower price.
6. Future Price Expectation: Expectations about future prices can influence current supply. If producers expect the price of a commodity to rise in the future, they might reduce current supply to sell more at the higher future price, leading to a decrease in current supply (leftward shift). Conversely, if they expect prices to fall, they might increase supply now to sell more before prices drop.