Determinants of Supply

Determinants of Supply

The main determinants of market supply of a commodity or service are:

1) Commodity’s Own Price:

Ceteris paribus, the higher the price of a commodity, the more profitable it is to engage in its production, hence, the higher the quantity that will be supplied and vice-versa.

2) Prices of Other Products:

a) Competitive products:

Firms are not permanently committed to the production of particular products. Because firms have the objective of maximising profits, rising prices for other products could cause firms to switch to the production of these products. For example, if the price of soft drinks were to rise sharply, breweries might switch from beer production to soft drinks bottling. Such products are said to be in competitive supply. The same resources may be used to produce them.

b) Joint products:

These are products that are always produced together. One is seen as the by-product of the other. An example is beef and hides. An increase in the price of beef, which increases the quantity of beef supplied to the market, will automatically increase the supply of hides, from which leather products are made.

3) Prices of Factor Inputs:

These are the prices firms pay to obtain factors of production or inputs. Firms pay wages and salaries for hiring labour, rent for the use of land, and interest for borrowing capital. Increase in the prices of inputs will in turn increase the cost of production, thereby causing supply to decrease. A decline in input prices lowers the cost of production and increases supply.

4) Level of Technology:

The kind of technology a firm uses to produce its products determines the kind and quantity of inputs necessary to produce a given quantity of a product. When a firm uses the best technology available, it can produce a unit of a good at the lowest possible cost (economic efficiency). An advancement or improvement in technology is the development of new means of producing a good using a smaller quantity of inputs than was previously possible (technical efficiency). Technological innovation also results in the development of new products that are less costly to produce than the replaced ones. Thus, technological change lowers the cost of production which, in turn, leads to an increase in profits and, therefore, increases supply.

5) Government Fiscal Policies (Taxes and Subsidies):

Taxes increase the cost of supplying a product and anything that causes the cost of supplying a product to increase will cause a decrease in the supply of the product. On the other hand, subsidies decrease the cost of supplying a product and hence, cause an increase in supply.

6) Weather and Other Natural Phenomena:

Changes in weather affect the supply of certain commodities especially agricultural products. A favourable weather condition, such as good rainfall, will increase the supply of agricultural products while an unfavourable weather such as drought will cause a decrease in the supply of agricultural products. Other natural phenomena such as floods, fire outbreaks, pests, and so on also affect the supply of agricultural products negatively.