Factors Influence of Supply - Supply Analysis, Business Economics & Finance | Business Economics & Finance - B Com PDF Download

In economics, supply refers to the quantity of a product available in the market for sale at a specified price at a given point of time.

Unlike demand, supply refers to the willingness of a seller to sell the specified amount of a product within a particular price and time.

Supply is always defined in relation to price and time. For example, if a seller agrees to sell 500 kgs of wheat, it cannot be considered as supply of wheat as the price and time factors are missing.

Similarly, if a seller is ready to sell 500 kgs at a price of Rs. 30 per kg then again it would not be considered as supply as the time element is missing. Therefore, the statement “a seller is willing to sell 500 kgs at the price of Rs. 30 per kg in a week” is ideal to understand the concept of supply as it relates supply with price and time.

Apart from this, the supply also depends on the stock and market price of the product. Stock of a product refers to quantity of a product available in the market for sale within a specified point of time.

Both stock and market price of a product affect its supply to a greater extent. If the market price is more than the cost price, the seller would increase the supply of a product in the market. However, the decrease in market price as compared to cost price would reduce the supply of product in the market.

For example Mr. X has 100 kgs of a product. He expects the minimum price to be Rs. 90 per kg and the market price is Rs. 95 per kg. Therefore he would release certain amount of the product, say around 50 kgs in the market, but would not release the whole amount. The reason being he would wait for better rates for his product. In such a case, the supply of his product would be 50kgs at Rs. 95 per kg.

Determinants of Supply:

Supply can be influenced by a number of factors that are termed as determinants of supply. Generally, the supply of a product depends on its price and cost of production. In simple terms, supply is the function of price and cost of production.

Some of the factors that influence the supply of a product are described as follows:

i. Price:

Refers to the main factor that influences the supply of a product to a greater extent. Unlike demand, there is a direct relationship between the price of a product and its supply. If the price of a product increases, then the supply of the product also increases and vice versa. Change in supply with respect to the change in price is termed as the variation in supply of a product.

Speculation about future price can also affect the supply of a product. If the price of a product is about to rise in future, the supply of the product would decrease in the present market because of the profit expected by a seller in future. However, the fall in the price of a product in future would increase the supply of product in the present market.

ii. Cost of Production:

Implies that the supply of a product would decrease with increase in the cost of production and vice versa. The supply of a product and cost of production are inversely related to each other. For example, a seller would supply less quantity of a product in the market, when the cost of production exceeds the market price of the product.

In such a case the seller would wait for the rise in price in future. The cost of production rises due to several factors, such as loss of fertility of land, high wage rates of labor, and increase in the prices of raw material, transport cost, and tax rate.

iii. Natural Conditions:

Implies that climatic conditions directly affect the supply of certain products. For example, the supply of agricultural products increases when monsoon comes on time. However, the supply of these products decreases at the time of drought. Some of the crops are climate specific and their growth purely depends on climatic conditions. For example Kharif crops are well grown at the time of summer, while Rabi crops are produce well in winter season.

iv. Technology:

Refers to one of the important determinant of supply. A better and advanced technology increases the production of a product, which results in the increase in the supply of the product. For example, the production of fertilizers and good quality seeds increases the production of crops. This further increase the supply of food grains in the market.

v. Transport Conditions:

Refer to the fact that better transport facilities increase the supply of products. Transport is always a constraint to the supply of products, as the products are not available on time due to poor transport facilities. Therefore even if the price of a product increases, the supply would not increase.

In India sellers usually use road transport and the poorly maintained road makes it difficult to reach the destination on time the products that are manufactured in one part of the city need to be spread in the whole country through road transport This may result in the damage of most of the products during the journey, which can cause heavy loss for a seller. In addition the seller can also lose his/her customers because of the delay in. the delivery of products.

vi. Factor Prices and their Availability:

Act as one of the major determinant of supply. The inputs, such as raw material man, equipment, and machines, required at the time of production are termed as factors. If the factors are available in sufficient quantity and at lower price, then there would be increase in production.

This would increase the supply of a product in the market. For example, availability of cheap labor and raw material nearby the manufacturing plant of an organization would help in reducing the labor and transportation costs. Consequently, the production and supply of the product would increase.

vii. Government’s Policies:

Implies that the different policies of government, such as fiscal policy and industrial policy, has a greater impact on the supply of a product. For example, increase in tax on excise duties would decrease the supply of a product. On the other hand, if the tax rate is low, then the supply of a product would increase.

viii. Prices of Related Goods:

Refer to fact that the prices of substitutes and complementary goods also affect the supply of a product. For example, if the price of wheat increases, then farmers would tend to grow more wheat than nee. This would decrease the supply of rice in the market.