Supply function shows the functional relationship between supply of a commodity and other determinants of supply such as price of the commodity, price of factors of production, state of technology, objectives of producer etc. All these factors influence the supply of a commodity.
Following are the major factors which determine or govern the supply of a commodity.
(1) Price of a Commodity:
One of the most important determinants of supply is the price of the commodity. Generally there is a positive correlation between the price of the commodity and the quantity of the commodity supplied. This statement talis that when price rises, the quantity supplied of the commodity rises and vice versa.
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(2) Prices of related Commodities:
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The supply of a commodity depends upon the prices of other commodities. When there is increase in the price of other related commodities, the production of a commodity whose prices are lower will rise. This will lead to increase in supply. There would be decrease in the supply of commodities, if prices of other related goods decrease.
(3) Goals of the Firm:
In a market economy the producers goal is to maximise profits. Besides, maximum sales, maximum output and maximum employment are also the goal of the firm or business. These goals affect the supply of the commodity.
(4) State of Technology:
Technological developments results in an incessant increases in the supply of various products. It brings down the costs and on the other raises the profit of the producers an<] hence the supply of commodity.
(5) The Price of Factors of Production:
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The cost of production of a commodity may rise due to increase in the prices of the various factors of production. This will result in a decrease in supply. Conversely, fall in the prices of such factors will lead to greater production and consequently an increase in supply.
(6) Natural Factors:
The supply of agricultural goods may decrease due to natural calamities like flood, drought and cyclone. On the contrary, better rain fall, improvement in irrigation and increase supply of manure etc. would naturally increase their supply.
(7) Government Policy:
The Government Policy relating to taxation and subsidy also regulate the supply of a particular commodity. Indirect taxes (such as sales tax, excise duty etc.) imposed by the government on a commodity is likely to increase its cost of production and thereby it will reduce supply. On the contrary, a reduction in taxes will have the opposite effect.
Sometimes Government pays subsidies on some commodities so as to assist the consumers to purchase the same and the producer to produce the commodities. Increase in subsidy increases the consumption and the supply. On the contrary decrease in subsidy decreases the consumption and reduces the supply
(8) Price Expectations:
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Price expectations may cause a change in supply. If the sellers anticipate a fall in prices in the near future, they will be anxious to sell more now at the prevailing price and this will increase the market supply. On the other hand, the expectation of a rise in prices will induce sellers to withhold supplies and this leads to a contraction of market supply.
(9) Agreement among the Producers:
Supply may be consciously decreased by agreement among the producers. It happened during the Great Depression when Production of seem commodities was restricted through international agreement among the producers.
(10) Transport and Communication:
Improvement in means of transport and communication may increase the supply of a commodity.
(11) Internal Peace and Stability:
Political disturbances, labour unrest and wars adversely affect production and supply. Internal peace and stability lead to larger supplies through increased production.