Determinants of quantity supplied of a good, Microeconomics

Determinants of quantity supplied of a good

The quantity of supplied of a product is influenced by factors such as the market price of the commodity, prices of inputs, technology, other output prices, government fiscal policy (taxes/subsidies), weather and other natural phenomena and population of suppliers (firms).

(i) The market price of the product

All things being the same, a firm offers more for sale as the price of the product rises and less for sale as its price falls.

(ii) Prices of Inputs

These are the prices firms pay to obtain factors of production or inputs. Firms pay wages and salaries for hiring labour, rent for the use of land and interest for borrowing capital. Increase in input prices in turn increases cost of production thereby causing supply to decrease. A supply decreases, the quantity of firms are willing to supply falls. A decline in input prices lowers costs of production and increases supply.

(iii) Technology

The kind of technology a firm uses to produce its products determines the type and quantity of inputs necessary to produce a given quantity of a product. When a firm uses the best technology available, it can produce a unit of a good at the lowest possible cost (economic efficiency). An advancement or improvement in technology is the development of new means of producing a good using a smaller quantity of inputs than was previously possible (technical efficiency).Technology innovation also results in the development of new products that are less costly to produce than the products they replace. Thus, technology change lowers production costs, which in turn leads to increase in profits and , therefore, increases supply.

iv) Prices of other products/outputs
Competitive supply products: Firms are not permanently committed to the production of particular products. Because firms have the objective of maximising profits, rising prices for other products could cause firms to switch to the production of different these products. For example, if the price of soft drinks were to rise sharply, breweries might switch from beer production to soft drink bottling. Such products are said to be in competitive supply. The same resources may be used to produce them.

Joint-supply products these are products that are always produced together. One is seen as the by-product of the other. Examples are beef and hide. An increase in the price of say beef, which increase the supply of hides, from which leather products are made.

V) Government Fiscal Policy (Taxes and Subsidies)

Taxes increase cost of supplying a product and anything that causes the cost of supplying a product to increase in turn causes a decrease in supply of the product whiles subsidies decrease of the cost of supplying a product and hence cause an increase in supply.

vi) Weather and other Natural Phenomena

Changes in weather affect the supply of certain commodities especially agricultural products. A favourable weather condition such as good rainfall will increase the supply of agricultural products whiles an unfavourable weather such as drought will cause a decrease in the supply of agricultural products. Other natural phenomena such as floods, bush fire, pests and so on also affect the supply of agricultural products.

vii) Population of Suppliers or Firms

When firms in an industry are earning supernormal profits, this may attract new firms into the industry (if it is not monopoly industry) which would in turn increase the supply of the product. On the other hand, if more firms exit an industry, this could cause supply to decrease.

Posted Date: 1/2/2013 1:21:55 AM | Location : United States

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