Determinants of supply are the factors that affect the supply of a product or service and that cause a shift in the supply curve.
However, these factors are held constant (according to the law of supply) to alleviate the effect of the law of supply especially with relation with quantity supplied and the supply price.
When the determinants change the supply curve shifts from one side to the other, and these supply determinants are said to determine the location of the supply curve at a certain point in time.
So what are the determinants of supply?
There are numerous factors that determine supply, and there are a total of 6 determinants of supply, including:
- Innovation of the technology
- The number of sellers in the market
- Changes in expectations of the suppliers
- Changes in the price of a product or service
- Changes in the price of related products
- Changes in tax and subsidies
We will have a look at each of these determinants in the following sections.
1. Innovation of the Technology
Modern technology incorporation in business and service delivery enables efficient, and efficacy in the production of goods and delivery of services reduces the overall costs of the final product.
The reduction in the production cost through technology will increase profits. Therefore, the supply increases and the supply curve will shift rightwards.
Technology rarely deteriorates and it ensures the business remains efficient therefore a constant supply of the goods and services.
2. Number of Sellers in the Market
When the number of sellers is high in a certain market, the quantity of product or service supplied to that market will be high and vice versa.
Therefore, an increase in the number of sellers in a market will decrease the supply and the supply curve shifts leftwards.
An example is a situation where more companies enter into an industry, this will increase the number of sellers, and therefore supply will increase as well.
3. Expectations of the suppliers
Changes in the expectations of the suppliers about the future price of a service or a product may affect the current supply.
However, unlike the other determinants of supply, the expectations of the supply can be quite difficult to generalize.
For example, when farmers anticipate that the price of the crop will increase. This will cause them to withhold the produce to benefit from a higher price.
This, in turn, reduces the supply and in the context of manufacturers when there is an expected increase in price then they will employ more resources to increase the output.
This is a major cause of an increase in supply.
4. Price of a Product or Service
An increase in the prices of the inputs will increase production costs. This will, in turn, shrink the profits.
Moreover, a decrease in the prices of the inputs will increase profits.
Since profit is a major incentive the producers supplying goods and services to a certain market will increase, the production of service or product when there is low production costs and vice versa.
An increase in the price of the inputs will reduce the supply of the commodity, the supply curve will shift leftwards, and a decrease in the price of inputs the price increases and the supply curve will shift rightwards.
5. Price of Related Products
Companies which manufacture related products, such as detergents, will shift their production to a particular product if that product is manufactured in large quantities. It increases the price, and there will be a reduction in supply.
An example is a firm that produces soccer balls and basketballs, when the price of soccer balls increases the firm will produce more soccer balls and less of basket balls, this means that the supply of basketballs will reduce.
6. Tax and Subsidies
High taxes reduce profits because the suppliers will have to pay huge bills to cater for their production.
Subsidies, on the other hand, reduces the cost of production, and the suppliers can gain profits by selling the product or service
An increase in subsidies will increase supply and a decrease in subsidies will decrease supply in the same manner.