Supply refers to various quantities of a commodity which a producer will actually offer for sale at a particular time at various corresponding prices. Supply of commodity depends upon a number of factors.
It is difficult to analyse the effect of a simultaneous change in all the factors. While studying the effect of any factor, other factors are assumed to be constant. Some of the important factors which affect the quantity supplied of a commodity in isolation are as follow.
1. Price:
It is the most important determinant of supply of a commodity representing gross earnings per unit of the goods sold. The higher the price of the commodity, more of the commodity will be offered for sale on account of rise in its profitability and vice-versa. The direct relationship between price and supply of a commodity is also referred to as the ‘law of supply’.
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2. Prices of Related Goods:
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Supply of a commodity also depends upon the prices of the related goods by affecting its relative profitability. For instance, if the price of a substitute good goes up, the producers will be tempted to produce that good to get higher profit.
Similarly, if the price of the substitute good falls, production of other commodity will become more profitable. On the other hand, the rise in the price of a complement (say, petrol) will reduce the supply of the commodity (e.g., cars).
However, the change in the quantity supplied of one commodity is lesser in response to a change in the price of other commodity than to change in its own price. In the former case, producers of a commodity can shift to several alternative products, when its price falls.
3. Cost of Production:
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Prices of the factors of production (raw materials, land, labour, capital, etc.) used in the production of a commodity constitute the cost of production. If the prices of these factors rise, the total cost of production goes up reducing profits.
In such a situation, the producers will divert their resources to the production of some other commodity using relatively less quantity of these factors, which can be produced at a lower cost. For example, a rise in the price of land will discourage the production of agricultural products. On the other hand, use of high yielding varieties of seeds, chemical fertilizers, tractors, etc. reduce the per unit cost of production of agricultural products.
The cost of manufacturing products can be reduced through the use of sophisticated machines. Goods produced on large scale, reduce the cost of production. Better organisation and management is one such important cause to reduce the cost of production.
4. State of Technology:
The state of technology changes over time. Improvements in technology increase the knowledge about the means of production and raise factor productivities. Hence, improvements in the methods of production reduce the cost of production and increase the profits.
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Discoveries and innovations also bring new variety of products. All this contributes to raise the supply upward. Firms supply more than before at the given prices as a result.
5. Goal of Producer:
The objective with which the producer undertakes production also affects the supply of the commodity. The goal of the producer may be to maximise total profits or to maximise sales to capture the market or to improve status, goodwill and prestige in the market.
Public enterprises whose goal is to increase production and generate more employment to maximise social welfare supply larger amount of commodity than profit motivated private firms.
The producers may also decide to cut back production or destroy stock in order to raise prices. During the ‘Great Depression’, the production of rubber, tea and some other commodities was restricted through international agreements among the producers. Coffee was thrown into the sea in Brazil.
6. Natural Factors:
The supply of agricultural goods to a great extent depends upon the natural conditions. If these factors (like rain, fertility of land, improved seeds, irrigation facilities, climate, etc.) are favourable, supply will increase.
On the contrary, earthquakes, heavy rains, floods, droughts adversely affect agricultural production. India experienced large production in the agricultural sector on account of ‘Green Revolution’ and more supply of agricultural inputs, fertilizers, water supply, pesticides, credit, etc.
7. Means of Transportation, Communication, Banking and Insurance:
Proper development of infrastructure ensures adequate supply of the commodities. In case of short supply, goods can be brought from surplus areas to the deficient ones.
8. Length of Time:
The supply of commodity remains more or less fixed in the market period, particularly, in case of perishable goods. In short period, the supply of a commodity can be increased by utilising the capacity fully by altering the factor proportion. In the long period, the output level can be adjusted fully.