Explain briefly any four factors affecting supply of a commodity
Answers
Some of the important factors affecting the supply of a commodity are as follows:
There are several important factors that determine supply of a commodity. A change in any one of these factors will result in a change in supply of the commodity.
Economics
1. Price of the given Commodity:
ADVERTISEMENTS:
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.
4. State of Technology:
Technological changes influence the supply of a commodity. Advanced and improved technology reduces the cost of production, which raises the profit margin. It induces the seller to increase the supply. However, technological degradation or complex and out-dated technology will increase the cost of production and it will lead to decrease in supply.
The factors that govern the supply of commodities are -
1. Price of the given Commodity:
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 a profit. It induces the firm to offer more for sale in the market.
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. An 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 the production of the given commodity to the production of other goods.
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, the decrease in prices of factors of production or inputs increases the supply due to the fall in the cost of production and the subsequent rise in profit margin.
4. State of Technology:
Advanced and improved technology reduces the cost of production, which raises the profit margin. It induces the seller to increase the supply. However, technological degradation or complex and out-dated technology will increase the cost of production and it will lead to a decrease in supply.
5. Government Policy (Taxation Policy):
An increase in taxes raises the cost of production and, thus, reduces the supply, due to the lower profit margin. On the other hand, tax concessions and subsidies increase the supply as they make it more profitable for the firms to supply goods.
6. Goals / Objectives of the firm:
Generally, the supply of a commodity increases only at higher prices as it fulfills the objective of profit maximization. However, with change in trend, some firms are willing to supply more even at those prices, which do not maximize their profits. The objective of such firms is to capture extensive markets and to enhance their status and prestige.