12 Determinants of supply
The general state of the economy, including factors such as inflation, interest rates and consumer confidence, can affect the level of supply.
1. Cost of Production
The cost of production is a key determinant of supply because it directly affects the profitability of producing a particular good or service.
The cost of production is a key determinant of supply because producers will only supply goods and services if they can do so profitably.
Higher costs mean that producers must charge higher prices to cover their costs and make a profit.
If prices cannot rise sufficiently to cover the higher costs, producers may stop supplying the good or service.
Similarly, lower costs allow producers to supply more at a given price, or to charge a lower price and still make a profit.
Thus, changes in the costs of inputs, labor, overhead, and other factors affect how much producers are willing and able to supply.
In addition, the cost of production is affected by other factors such as wages, raw material costs, and energy costs.
Recall that the cost of production directly affects the elasticity of supply and the supply curve.
2. Technological Advances
New technologies can help producers increase output, reduce production costs, and improve the quality of goods or services.
Consequently, producers may be willing and able to supply more goods or services to the market at a given price.
Example 1
If a new machine or process is invented that allows a producer to produce more goods at a lower cost, the producer may choose to increase the quantity of goods supplied to the market because it is more profitable for him to do so.
Similarly, technological advances may create new opportunities to produce entirely new goods or services, thereby extending the supply curve in a given market.
Example 2
Advances in logistics and transportation technology can reduce the time and cost of transporting goods from producers to consumers. This allows producers to supply more goods to a larger market at a given price.
The speed and efficiency of the supply chain can also be improved through technological advances.
3. Number of Suppliers
The number of suppliers affects supply because it determines the amount of total production capacity for a good or service.
More suppliers means more competition, but also potentially more total production. Some key ways in which the number of suppliers affects supply include
Case 1
With more suppliers, there is more total production capacity, so supply can increase to meet demand.
This helps ensure the availability of goods and services.
Case 2
With more suppliers, there is more competition. This can drive down prices, which can increase demand, or reduce supply from less efficient producers.
Either way, it affects total supply.
Case 3
Existing suppliers may have more control over supply if there are significant barriers to entry for new suppliers.
With fewer suppliers, it is easier for them to coordinate to restrict supply and keep prices high.
Thus, the number and concentration of suppliers affect the competitiveness of a market and the elasticity of supply.
Case 4
In some cases, suppliers may exit a market when prices or demand are low and enter when prices or demand are high.
The ability and willingness of new suppliers to enter or exit a market affects the supply response to price changes.
Conclusion
As we have seen, important determinants of both the level and elasticity of supply are the number of suppliers and the ease with which new suppliers can enter a market.
The more suppliers, the more supply can increase to meet demand, but the more complex the dynamics.
4. Price of inputs
The price of resources and materials is a determinant of supply because it determines the cost of production for producers.
It costs producers more to produce their goods and services when the price of inputs such as raw materials and components rises.
As a result, they are usually forced to raise their prices to cover their costs and maintain their profit margins. If they cannot raise prices, it may not be profitable for them to continue producing, so they may reduce supply.
For example
If the price of oil rises, the cost of producing and transporting goods may also rise, leading to a reduction in the supply of goods.
On the other hand, lower prices for inputs will reduce costs and may allow producers to lower their prices and/or increase the supply of goods.
Example
If the price of steel falls, the cost of producing certain goods, such as automobiles or household appliances, may also fall, leading to an increase in the supply of those goods.
5. Government Policies and Regulations
The rules of the game under which suppliers operate are created by government policies and regulations.
How these policies affect costs, prices, and other factors will, in turn, affect the incentive and ability of producers to supply goods and services.
Taxes
Taxes imposed by the government on producers can increase costs and reduce supply.
For example
A higher sales tax on goods could discourage production. Taxes on income or profits can also reduce profit margins and potentially reduce supply.
Subsidies
Government subsidies help producers by lowering costs. This can encourage more production and increase supply.
For example
Subsidies for renewable energy can increase the supply of wind and solar power by making it more affordable to produce.
Price controls
Government price controls, such as price caps, can limit price increases, which can reduce production incentives and decrease supply.
Price floors, on the other hand, can increase supply through the guarantee of a minimum price.
Regulations
Regulations can increase costs and decrease supply by regulating production, labor, the environment, etc.
Example
Tighter regulations on emissions could reduce the supply of certain goods. Occupational licensing and other labor regulations can limit the supply of labor.
Regulations can also increase quality and safety. However, this usually comes at the cost of reducing supply.
Trade Policy
Government trade policies, such as tariffs, quotas, and trade agreements, can restrict or open access to foreign supplies.
This can reduce or increase the total supply of a good, depending on the amount imported or exported.
Trade policy has a significant impact on the supply of internationally traded goods.
Imagen by 6. Expectations
Producers may choose to reduce their supply of a good or service in the present, hoarding it in anticipation of higher profits in the future, if they expect the price of the good or service to rise in the future.
Conversely, producers may choose to increase their supply of a good or service in the present, trying to sell as much as possible before the price falls, if they expect the price of the good or service to fall in the future.
When producers feel optimistic about the future, they are more likely to increase supply. If they feel pessimistic or uncertain, they are more likely to restrict supply.
Expectations are an important supply factor, but they are difficult to measure.
Let's take a closer look:
Predicting future prices.
Producers may produce more now to take advantage of current prices if they expect prices to rise in the future. This increases current supply.
They may limit current production if they expect future prices to be lower.
Expected future demand
Producers may increase production now to take advantage of higher future demand for a good or service.
This increases current supply. If future demand is expected to be low, producers may limit supply.
Expected costs
A forecast of higher future costs may cause producers to increase supply now, before costs rise.
Forecasting lower costs in the future may cause producers to delay production and wait for cost conditions to improve.
Uncertainty
A high degree of uncertainty about the future may discourage some producers from increasing supply because the risks are unclear.
Thus, supply may become more volatile or limited as a result of economic instability and uncertainty.
7. Natural events
Natural events related to the environment, weather and climate can affect the availability of inputs and resources on which suppliers depend. This in turn affects the supply of final goods and services in various markets.
Weather phenomena
Harvests, infrastructure and other supply components can be damaged by events such as droughts, floods, hurricanes, etc.
This reduces the supply of goods and services that depend on the affected resources. For example, the supply of water-intensive crops may be reduced as a result of a major drought.
Climate change
Long-term changes in climate can affect supply. For example, rising temperatures and changing weather patterns can affect agricultural production and food supply.
Thawing permafrost can open up new resources or make some resources inaccessible. Extreme weather events can also disrupt supply chains. In many sectors, it is expected that climate change will have an impact on supply, with uncertain consequences.
8. Availability of Natural Resources
The availability of natural resources such as oil, minerals, timber, water, etc. is dependent on the processes of nature. As resources are used and extracted, the supply decreases.
New resources can also be discovered, increasing the supply. The rate at which supply can increase or decrease depends on the rate at which resources are used and replenished.
9. Changes in the Global Economy
The global economy links the cost structures of many producers in different countries.
The supply of goods and services produced in that market may increase to meet growing demand as demand from emerging markets increases.
Increased competition from foreign producers may reduce the price that local producers can charge for their goods and services, which may affect their willingness to produce and supply goods and services to the market.
Domestic producers may increase their supply to export more if global demand for a product increases.
World Events
Major events that affect the global economy can reduce demand, increase costs, or disrupt supply chains, such as financial crises, trade wars, or geopolitical events.
This reduces supply. Periods of strong global growth can increase demand and potentially supply. Domestic suppliers are therefore often affected by the dynamics of the global economy in general.
Globalization
The increasing global interconnectedness of economies through trade, finance and multinational corporations increases the pace and impact of developments around the world on domestic suppliers.
As the global economy becomes more integrated, global events, costs and demand are likely to have an even greater impact on domestic supply.
This makes monitoring the global context increasingly important to anticipate changes in domestic supply.
10. Related goods and services
The supply of a particular good can be affected by the prices of goods that are related through substitutability, complementarity, or the input-output process.
Substitutes
If the price of a substitute increases, demand may shift to the other good, increasing its supply. For example, if the price of beef increases, the demand for chicken may increase, increasing the supply of chicken.
Complementary
If the price of a complementary good falls, the demand for the other good may increase. This could increase the supply of the complementary good. For example, a decrease in the price of peanut butter may increase the demand for jelly and increase the supply of jelly.
Inputs
Production costs and supply are affected by the prices of inputs used to produce another good. Higher input prices mean higher costs, which may reduce supply.
11. Competition
In a competitive market, producers have an incentive to supply more goods or services in order to increase their market share and profits.
In a less competitive market, producers may be less motivated to supply goods or services because they have less incentive to compete on price or quality.
The level of competition in a market can directly affect the quantity of goods or services that producers are willing to supply.
12. Demographics
Although demographics themselves do not directly affect supply, they do determine the demand for various goods and services.
And since supply is a function of demand, demographic changes and the patterns of demand they create will ultimately determine what and how much suppliers are willing to produce.
Demographic change is an important trend to track in order to anticipate how supply will evolve to meet demand.
Population size
A larger population means greater demand for goods and services, which can increase supply. A smaller population is a decrease in demand and can lead to a decrease in supply.
Population growth
Rapid population growth means that demand increases rapidly, which can strain supply. Producers may have difficulty meeting the increased demand.
Slow or negative population growth reduces demand growth and may reduce supply.
Age Distribution
The age distribution of a population affects the types of goods and services demanded. An older population may have more demand for health care and leisure services, while a younger population may have more demand for education and children's services.
Providers would tailor supply to the demographic needs of the population.
Income levels
Purchasing power and demand are influenced by demographic factors such as employment and income levels. Higher average incomes mean higher demand for premium goods and services.
Lower incomes could limit demand for higher-priced goods. Suppliers would consider the demographic income of their target population when determining how much to supply.