Supply is defined in economics as the total amount of a particular product or service a supplier provides to a consumer at a particular time and price level. It is usually determined by market movements.
Sellers of goods and services constitute the supply side in a market economy. We know that the term “demand” refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during that same period. Whereas the term “supply” refers to the amount of a good or service that the producers are willing and able to offer to the market at various prices during a given period of time,
The three important points that apply to supply are as follows:
- Supply is what a firm offers for sale in the market, not necessarily what they are able to sell. What is offered may not get sold.
- Supply requires both the ability and the willingness to supply. Production cost is often the primary influence on ability.
- Supply is a flow. Supply is identified for a specified time period. The quantity supplied is ‘so much’ per unit of time, per day, per week, or per year.
Although price is an important consideration to be considered while determining the willingness and desire to part with commodities, there are many other factors that determine the supply of a product or a service. which are as follows:
Determinants of supply:
- Price of good
- Prices of related goods
- Prices of factors of production
- State of technology
- government policy
- The nature of competition and the size of industry
- Expectations
- Number of sellers
- Other factors
Now let us understand each one of the factors:
Price of the good: Other things being equal, the higher the relative price of a good, the greater the quantity of it that will be supplied. This is because the firm produces goods and services to generate profits, and ceteris paribus, profits rise as the price of its products rises.
Prices of related goods: If the prices of other goods rise, they become relatively more profitable for the firm to produce and sell than the goods in question. When a seller can get a higher price for a good, producing and selling it becomes more profitable. Even by drawing resources from other goods they produce, producers will allocate more resources towards its production. For instance, an increase in comic book prices will encourage publishers to divert resources from the creation of other books (like novels) and use them toward the creation of comic books.Another illustration is how farmers might switch from growing corn and soybeans. to wheat if the price of wheat increases. It indicates that if the price of Y rises, the amount of X that is given will fall.
The price of factors of production: Supply is significantly impacted by the cost of production. The company doesn’t sell anything if its costs are higher than the profit it can make from selling the goods. A rise in the price of an input causes a decrease in supply. Producers decrease the amounts they are willing to supply when the cost of resources, such as labor, raw material costs, and loan rates, increases. Lower input costs do, in fact, increase production’s profitability, encourage existing firms to expand production, and attract new firms to enter the market. A rise in the price of a particular factor of production will cause an increase in the cost of making those goods that use a great deal of that factor rather than in the cost of producing those that use a relatively small amount of the factor.For instance, a rise in land prices will have a significant impact on the cost of producing wheat and a little impact on the cost of producing automobiles. The relative profitability of various production lines will change as a result of a change in one factor’s price, which will also induce producers to switch from one line to another, changing the supply of various commodities.
State of technology: The supply of a particular product depends upon the state of technology as well. The use of new technology in an industry (such as automation) increases production efficiency and reduces production costs.Inventions and innovations tend to make it possible to produce more or better goods with the same resources, and thus they tend to increase the quantity supplied of some products and to reduce the quantity supplied of products that are displaced.Supply is further influenced by the availability of spare production capacity, the ease and cost of factor substitution, and the cost of such substitution.
government policy: Government rules and regulations have an impact on how much firms want to sell or are allowed to sell. Commodity taxes, such as excise taxes, sales taxes, and import levies, may be imposed on a product’s production.Due to the increased cost of production caused by these taxes, an increase in the supply of a good would only occur when the market price rises. On the other hand, subsidies and other funding programs for producers lower the cost of production and thus provide an incentive to the firm to increase supply.Production tends to fall when the government imposes restrictions such as import quotas on consumer goods and inputs, rationing of input supply, etc.
Nature of competition and size of industry: Supply will be higher in a competitive environment than it would be in a monopolistic one.
Expectations: The choices of firms with respect to selling the product now or later depend on expectations of future prices.Sellers compare current and future prices. A reduction in supply occurs today when the price of a good or service is predicted to rise in the future; a supply increase occurs today when the price is anticipated to decline.
Number of sellers: There will be more supply if there are many firms in the market. In addition, the supply curve for an industry shifts to the right as new firms, domestic or foreign, enter the market.
Other Factors: The availability of a good also depends on the government’s industrial and foreign policies; the firm’s goals; the availability of infrastructure; natural factors like weather, floods, and earthquakes; as well as man-made factors like war, labor strikes, communal riots, etc.
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