Explain any three determinants of supply of a commodity.
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- Price of the commodity
- Goals of the producer
- Price of related commodities
- Input Prices
- Techniques of Production
- Nature of the Industry
- Natural Factors
- Agreement among producers
- Transport and Communication Facilities
- Expectations of Future Prices
- Policy of Taxation and Subsidies
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1. Price of the given Commodity:
The most important factor determining the supply of a commodity is its price. As a general rule, price of a commodity and its supply are directly related. It means, as price increases, the quantity supplied of the given commodity also rises and vice-versa. It happens because at higher prices, there are greater chances of making profit. It induces the firm to offer more for sale in the market.
Supply (S) is a function of price (P) and can be expressed as: S = f (P). The direct relationship between price and supply, known as ‘Law of Supply’. The following determinants are termed as ‘other factors’ or factors other than price’.
2. Prices of Other Goods:
As resources have alternative uses, the quantity supplied of a commodity depends not only on its price, but also on the prices of other commodities. Increase in the prices of other goods makes them more profitable in comparison to the given commodity. As a result, the firm shifts its limited resources from production of the given commodity to production of other goods. For example, increase in the price of other good (say, wheat) will induce the farmer to use land for cultivation of wheat in place of the given commodity (say, rice).
3. Prices of Factors of Production (inputs)
When the amount payable to factors of production and cost of inputs increases, the cost of production also increases. This decreases the profitability. As a result, seller reduces the supply of the commodity. On the other hand, decrease in prices of factors of production or inputs, increases the supply due to fall in cost of production and subsequent rise in profit margin.
To make ice-cream, firms need various inputs like cream, sugar, machine, labour, etc. When price of one or more of these inputs rises, producing ice-creams will become less profitable and firms supply fewer ice-creams.
WISH U A HAPPY REPUBLIC DAY
The most important factor determining the supply of a commodity is its price. As a general rule, price of a commodity and its supply are directly related. It means, as price increases, the quantity supplied of the given commodity also rises and vice-versa. It happens because at higher prices, there are greater chances of making profit. It induces the firm to offer more for sale in the market.
Supply (S) is a function of price (P) and can be expressed as: S = f (P). The direct relationship between price and supply, known as ‘Law of Supply’. The following determinants are termed as ‘other factors’ or factors other than price’.
2. Prices of Other Goods:
As resources have alternative uses, the quantity supplied of a commodity depends not only on its price, but also on the prices of other commodities. Increase in the prices of other goods makes them more profitable in comparison to the given commodity. As a result, the firm shifts its limited resources from production of the given commodity to production of other goods. For example, increase in the price of other good (say, wheat) will induce the farmer to use land for cultivation of wheat in place of the given commodity (say, rice).
3. Prices of Factors of Production (inputs)
When the amount payable to factors of production and cost of inputs increases, the cost of production also increases. This decreases the profitability. As a result, seller reduces the supply of the commodity. On the other hand, decrease in prices of factors of production or inputs, increases the supply due to fall in cost of production and subsequent rise in profit margin.
To make ice-cream, firms need various inputs like cream, sugar, machine, labour, etc. When price of one or more of these inputs rises, producing ice-creams will become less profitable and firms supply fewer ice-creams.
WISH U A HAPPY REPUBLIC DAY
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