Other determinants of supply

Like demand, supply is not simply determined by price. The other determinants of supply are
as follows

1. Cost of production:
The higher the costs of production, the less profit will be made at any price.

As costs rise, the firms response in 2 ways:

Reduce production
Switch to alternate products whose costs have not risen so much

The main reasons for a change in costs are as follows:

1. Change in input prices:

Costs of production will rise if wages, raw material prices, rents, interest rates or
any other input prices rise.
2. Change in technology:
Technological advancements can alter the costs of production
3. Changes in organization methods:
In many firms, reorganizing production will result in various cost savings
4. Government Policy:
Government subsidies can lower costs
While taxes can increase them

2. The profitability in alternative products (substitutes in

supply)
If a product which is a substitute in supply becomes more profitable to supply than before,
then producers are likely to switch from the first good to this alternative which leads to
decrease in supply of the first good

Substitute in supply: These are 2 goods where an increased production of one means
diverting resources away from producing the other

Other goods are likely to become more profitable if:

their prices rise

their cost of production falls

Example
 If a price of carrot goes up, or the cost of producing carrot comes down, farmers may
decide to cut down potato production in order to produce more carrots

3. The profitability of goods in joint supply

Joint supply refers to the situation where producing one good leads to the
simultaneous production of another
for example,
crude oil refining produces petrol along with other fuels like diesel and paraffin
If petrol is in high demand, then petrol will be produced more, along with it diesel
and paraffin will be produced more too

4. Nature, 'random shock' and other unpredictable events.

In this category we will include:

Weather and Diseases affecting the farm output

Wars affecting the supply and imported raw materials
The breakdown of machinery
Industrial disputes
Earthquakes, floods and fires, etc

5. The aims of producers.

Diverse Producers aim:

Firms have varied goals which impacts the quantity they choose to supply
for example, profit maximizing firms supply a different quantity compared to the firms
aiming to maximize sales

Note: For most of the time we shall assume that firms are profit maximisers

6. Expectations of future price changes.

If price is expected to rise in future, producers may temporarily reduce the amount they
sell
Instead they are likely to build up their stocks and only release them on the market
when prices does rise
At the same time they may install new machines or rake on moer labour, so that they
can be ready to supply more when the price has risen

7. The number of suppliers

if new firms enter the market, supply is likely to increase