Factors determining supply

Factors determining supply

Price of the commodity

Higher the price larger the supply. Price is the incentive for the producers and sellers to supply more.

Price of other commodities

The supply of a commodity depends not only upon its price but also price of other commodities. For instance if the price of commercial crops like cotton rise, this may result in reduction in cultivation of food crops like paddy and so its supply.

Price of factors

When the input prices go up, this results in rise in cost and so supply will be affected.

Price expectations

The expectation over future prices determines present supply. If a rise in price is anticipated in future, sellers tend to retain their produce for future sale and so supply in present market is reduced.

Technology

With advancement in technology, production level improves, average cost declines and as a result supply level increases.

Natural factors

In agriculture, natural factors like monsoon, climate etc. play a vital role in determining production level.

Discovery of new raw materials

The discovery of new raw materials which are cheaper and of high quality tends to increase supply of the product.

Taxes and subsidies

Subsidies for inputs, credit, power etc. encourage the producers to produce more. Withdrawal of such incentives will hamper production. Taxes both direct and indirect kill the ability and willingness to produce more.

Objective of the firm

When the goal of the firm is sales maximisation or improving market share, the supply of the product is likely to be higher.