Determinants Of Supply

Updated on April 4, 2024
Article byKosha Mehta
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Determinants Of Supply?

Determinants of supply are the variables that can alter or influence the supply of a commodity on the market. Business managers analyze the determinants of supply to study and anticipate the future supply of a product and strategize accordingly.

Determinants of Supply 1

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Determinants Of Supply (wallstreetmojo.com)

Determinants of supply may include a price or non-price variables. Various factors can affect, influence, and decide supply, and they tend to define its status, character, and trend over time. These factors impact the supply of the commodity in a positive or negative manner. Studying determinants of supply is important for managers to foresee the conditions and prepare accordingly. However, not all factors affecting supply can be predicted or controlled, although a proactive approach may help in dealing with possible changes.

Key Takeaways

  • Determinants of supply definition refer to factors that can change or affect how readily a manufacturer is able to deliver a certain good or service.
  • Determinants of supply may include a price or non-price variables. These factors impact the supply of commodities in a positive or negative manner.
  • Business managers analyze the determinants of supply to study and anticipate the future supply of a product and strategize accordingly.
  • Major determinants of supply include the price of the product or service, price of a related item, price of factors of production, technology intervention, administrative policy, and price speculations.

Determinants Of Supply Explained

The terms determinants of supply in economics refer to the factors of elements that affect the supply of goods and services in the market. It is the quantity of products that the producer or the manufacturer will be able to or is willing to produce and sell to the customers in the market at different price levels.

Typically the producers look for high prices while selling the goods so that they can make profits. The input costs during production also play an important role. If they are high, the production cost goes down, pulling down the supply in order to maintain the profit level. The prices of complementary goods influence the supply too.

The producers continuously try to remain technologically updated and advanced so that the cost of production comes down due to usage of high level of technologically advances machinery and materials. This not only increases the supply within less time and limited efforts, but also help in remaining a step ahead from the competitors in the market through supply of better products at less cost.

However, it is to be noted that even though the determinants of supply of labor or any other elements coordinate with each other in the market, the relation of them with the supply is not always linear. Any variation in the determinants will change the supply curve and the quantity of supply in the market.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

List Of Determinants Of Supply in Economics

In economics, it is essential to understand the determinants of supply and demand. Therefore, in this article, let us look at the determinants that affect supply favorably or adversely. However, it is worth noting that all these factors might not be at play in every product, it varies.

Determinants-of-Supply

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Determinants Of Supply (wallstreetmojo.com)

#1 – Price Of The Product Or Service

The price of the product or service is the most evident factor in determining supply. If all other variables remain constant, the supply of a product will increase if its relative price rises. To put it another way, a company provides goods or services in order to generate a profit, and when prices increase, so does supply to increase profits. Hence, increasing the supply of a product is motivated by a price rise. However, there may be diminishing returns associated with attempting to increase the resources required to manufacture a product in a short amount of time.

Increasing prices often improves profits, which is the primary motivation for sellers to create more. Consequently, the influence of the supply price depends on resource (or input) prices as well. If resource prices climb more rapidly than supply prices, producers will have less motivation to produce more. Similarly, as resource prices fall, earnings for the same price level increase, therefore sellers will produce more.

If the price of related items rises, the company will raise its supply of the higher-priced commodities. This results in a decrease in the supply of low-priced items.

Suppose that wheat’s price increases. Consequently, it is more profitable for businesses to provide wheat than maize or soybean. Consequently, the supply of wheat will increase while the supplies of corn and soya beans will decrease. If a certain product is produced in huge amounts, companies that produce similar goods, such as detergents, will transfer their manufacturing to that item. This causes the price to rise and the supply to decrease.

To give another example; say a company manufactures both soccer balls and basketballs; as the price of soccer balls rises, the company will create more soccer balls and fewer basketballs, resulting in a decreased supply of basketballs.

#3 – Price Of Production’s Elements Or Factors Of Production

Many expenses are associated with the production of an item. If the price of a particular element of production rises, the cost of producing items that rely heavily on that factor will climb dramatically. This might be the determinants of supply of labor or any other factors of production.

Whereas an increased price of one input causes a little rise in the manufacturing costs of product that utilizes a less quantity of that input. For instance, a rise in the price of land will substantially impact the cost of growing wheat but a little impact on the cost of making vehicles.

Consequently, a change in the price of a factor of production influences the relative profitability of several production lines. This forces producers to switch from one line to another, resulting in an altered supply of commodities.

Expenses of the components of production – assuming a constant price, a rise in costs, such as labor costs, will diminish the firm’s desire and capacity to provide. Cost reduction increases a company’s willingness and capacity to provide. A rise in the pay of restaurant servers, for instance, will raise the cost of providing meals, resulting in the restaurant providing fewer meals at all rates. Changes in currency rates will affect the cost of imported raw materials; a decrease in the exchange rate would raise import costs and an increase will decrease imported prices.

#4 – Technology Intervention

Innovations and inventions in technology typically allow for the production of higher-quality and/or greater quantities of things with the same amount of resources. Consequently, the degree of technology can either enhance or decrease the supply of specific items.

#5 – Administrative Policy

Commodity taxes such as excise duty, import charges, and the Goods and Services Tax highly affect manufacturing costs. These taxes might increase total expenses. Consequently, the supply of commodities that are affected by these levies grows only when the price rises. On the other side, subsidies cut production costs and typically result in an increase in supply.

It is possible to attribute the supply to government policy. The government imposes several rules, taxes, and production subsidies, all of which influence the supply. For instance, say manufacturing taxes on commodities will raise the marginal cost of manufacturing. Conversely, production subsidies will lower marginal costs. Thus, the minimal price at which the commodities are to be delivered increases or decreases as well.

#6 – Expectations/Speculations Of Price

It can also affect the current supply, because if suppliers anticipate a price reduction in the near future, they may attempt to liquidate all of their current stock. Similarly, if suppliers anticipate that prices will rise in the future, they may hang on to their inventory until prices rise.

#7 – Other Elements

In the concept of determinants of supply and demand, several additional elements influence the supply of products or services, such as international policies, the firm’s objectives, infrastructure facilities, market structure, and natural causes.

Example

Let us take an example to understand the concept of various determinants of supply.

We assume that Woods Ltd is a furniture manufacturing company that produces office and household furniture and has good market presence. But recently there are some now entrants in the market who have very efficient machinery and tools and can produce more furniture at very less time.

Thus, Woods Ltd invested in those type of machines in order to increase the supply, which helped in increasing production. But unfortunately the supply of good quality of wood in the market reduced, increasing the wood prices and the cost of paints went up, increasing the overall production cost further.

In the above example we note that each determinant of supply act in different manner and all of them have a certain level of influence in the quantity of goods available in the market.  

Determinants Of Supply Vs Law Of Supply

Both the above are two economic concepts that are very closely related to each other, and both explain how the manufacturers respond to market changes and determine how much quantity of goods they can and will supply at various price levels. However, it is necessary to understand the differences between them.

  • The determinants of supply in economics deals with the factors that influence the supply of goods in the market and the latter deals with the relation between the price and supply of goods in the market.
  • The determinants may or may not show a linear relation between the supply and prices but the law of supply states a linear relation where as price increase, the supply also increases in order to take advantage of rise in price and earn profits.
  • The law of supply is dependent on the price, whereas the concept of determinants of quantity supplied take into account the factors that influence the supply.

Thus, overall, it is important to understand both the concepts very thoroughly so that manufacturers can take important decisions regarding production and supply of products and services to earn profits.

Frequently Asked Questions (FAQs)

What does determinants of supply mean?

Determinants of supply are the variables that can alter or influence the supply of a commodity on the market. There are a variety of elements that can affect, influence, and decide supply, and these factors tend to define the status, character, and trend of supply across time.

What are the determinants of supply and demand?

Determinants of demand may include preferences, inclinations, or popularity Count of purchasers, buyers’ earnings, cost of an alternative product, cost of related products, and future price expectations for products. Determinants of supply may include prices of inputs, technology, taxes and subsidies, price forecasts, and the quantity of sellers on the market.

What are the determinants of the supply of money?

The drivers of money supply are both exogenous and endogenous and may be generally defined as the minimum cash reserve ratio, the amount of bank reserves, and the willingness of the populace to hold currency compared to deposits.

This has been a guide to what are Determinants Of Supply. We explain them with example, list of determinants and differences with law of supply. You may learn more from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *