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WHAT SUPPLY IS IN ECONOMICS AND THE DETERMINANTS OF SUPPLY

Updated on March 5, 2011

Supply is the amount of commodity producers or sellers are willing and able to offer for sale at a given price at a particular period of time. The quantity to be offered for sale depends on the price and the conditions of supply.

Supply does not mean entire stock of goods or total productivity. It is only that proportion of a product put on the market at the ruling market price at the time. If for example a farmer produces 30bags of rice and the ruling market price is $70 per bag, he may offer six bags for sale. In this case supply is 6bags and not the total production of 30 bags. If price increases to $85 per bag, he may supply 9 bags out of the total of 30 bags. Producers are prepared to supply more at higher prices and less at lower prices

Aside price a number of other variables may be important in determining the supply of a product and it is important that these are taken into account in the supply function of that product. A supply function describes the relationship between the amount of a product sellers are willing and able to offer for sale and a set of variables that determine it.

WHAT FACTORS INFLUENCE THE QUANTITY OF A PRODUCT THE SELLER PUTS ON THE MARKET

The quantity of a commodity a producer or seller is willing and able to offer for sale depends on a number of factors. These include:

The commodity’s own price

The price of the commodity in question influences the quantity of that product that is supplied. At higher prices, profit margins increase, given the cost of production of that product. Producers are therefore encouraged to produce more and hence supply more. Producers are rational. At lower prices, profit margins are low; the rational producer will therefore produce less and supply less. Again at lower prices, only the most efficient producers of a particular commodity would make any profits, producing the commodity. As prices rise, producers who could not previously compete will find that they can now make profits and therefore will wish to supply the commodity. In general, higher prices are needed to provide an incentive for firms to produce more of a particular product. Other things being equal, supply curves slope upwards from left to right. The number of producers in a particular industry also determines the market supply for a commodity. In a competitive industry, where there is free entry and exit, the number of producers in the industry changes as the price change. When price increases and profit margins increase, potential producers enter into the industry, thereby increasing the supply. On the other hand when price falls, some producers may go out of the market and therefore decreasing the quantity supplied.

Input Price

All things that a firm uses to produce its output, such as materials, labor, machine and others are called the firm’s input. Other things being equal, the higher the price of an input used to make a commodity, the less will be the profit from making the commodity, given the cost. Thus the higher the price of any input used by a firm, the lower will be the amount that firm would produce and offer for sale at any given price of the commodity. Increase in wage, interest, rent and price of materials have the effect of increasing cost and hence reducing supply.

Prices of other commodities

Other things being equal, changes in the prices of other commodities would influence the producer’s decision towards supply. There are commodities that have joint supply. This involves commodities which are inevitably produced together. The production of one commodity leads to the production of another. Such commodities like palm oil and palm kernel; mutton and wool are produced from a single source. An increase in the price of the other commodity leads to an increase in the supply of the commodity in question. For example an increase in the price of palm oil would result in an increase in the supply of palm kernel and vice versa, other things being equal.

Technology

As a determinant of supply, technology must be interpreted broadly. It embraces all know-how about production methods, and not merely the state of available machinery. An improvement in technology would increase supply, since producers will be willing to supply a larger quantity than before at each price. For example an improvement in cocoa refining makes it possible to produce more chocolate at any given total cost. In agriculture, the development of disease-resistant seeds is a technological advance. Improved weather forecasting might enable better timing of planting and harvesting. Each of these technological advances enables firms to supply more at each price. A technological advance is any idea that allows more output from the same input as before.

Goal of the Firm

In economic theory firms are usually assumed to have a single goal i.e. profit maximization. Firms could, however, have other goals either in addition to or as a substitute for profit maximization. If firms value size, they may produce and supply more than the profit-maximizing quantities. If for example firms worry about their image in society, they may forsake highly profitable activities when there is a major public disapproval. They may therefore readjust to meet the requirements of customers. This will dictate the direction of supply.

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