Factors affecting supply

Factors affecting supply
See also
Change In Supply Decreasing cost industry Price control Monopson Factors affecting pricing Flexible pricing Price Law of supply and demand Price controls

Factors affecting supply are widely discussed in economics, marketing and strategic planning. The amount of goods and services available at market at given price and time depends on cost of production and final profit made from transaction, which are affected by number of minor factors. Main determinants of supply are: cost of production, prices, number of sellers, technological progress and government policy.

Factors affecting supply

According to the literature (Katz & Murphy, 1991; Kilian, 2009; Shulz, 2005; Rumánková & Smutka, 2013), most common factors affecting business supply include:

• technological changes and innovation (faster and more efficient production leads to increase in supply)
• price changes (producers are willing to offer larger quantities when the price of their products is higher because every seller seeks to maximize profits - law of supply)
• producers expectations about prices (if the expected price is higher, they will rise production and vice versa)
• climate conditioning, seasonal changes, access to natural resources
• government subsidies (government money can stimulate production)
• tax regulations (lower taxes encourage businesses to produce more, higher taxes slow down the economy)
• number of producers and competition among them (more firms at market cause increased supply, less firms means lower supply)
• cost of production: natural resources, raw materials, input
• wages and labour market capacity
• interest rates (lower interest rates increase production and investment in new technology and machinery, higher interest rates slow down production)
• consumers demand (higher demand will increase supply, lower demand decrease supply)
• availability and prices of substitutes (consumers are very likely to purchase cheaper option if it is available, so the supply of primary product will decrease)
• effectiveness of branding and marketing campaigns
• current preferences, tastes and trends
• price of related product (if profit from producing related good, which certain company is also able to generate increase, supply of primary good will decrease)
• price of competitive products (there are several strategies but usually price is set relatively to the competitors price)
• price of complementary products (change in price of complementary product will lead to relative price change of primary product)
• infrastructure and cost of transportation
• export regulations (wider supply chain rises supply)
• currency exchange rates (appreciation of currency will decrease export, depreciation will increase demand for exported goods)
• changes in demographics (individuals considered as a labour force as well as potential customers)

Types of supply

We can distinguish several types of supply: (Marshall, 2009)

• short term supply - certain costs of production are fixed in short term
• long term supply - long term supply is more elastic than short term, firms have time to adjust prices, number of workers, optimize production and increase or decrease total supply in order to maximize output
• composite supply - configuration of two or more goods or services that are offered together by the same supplier
• joint supply - production process during which more than one output is created (primary product and by-product)
• market supply - total supply that all producers are willing to offer at given price in particular period of time

Examples of Factors affecting supply

1. Cost of Production: The cost of the factors of production, such as labor, raw materials, land, and capital, will affect the cost of producing goods and services and thereby influence the supply of those goods and services. For example, if the cost of labor increases, then the cost of producing a good or service will also increase, resulting in a decrease in the supply of that good or service.
2. Prices: The price of a good or service will also affect supply. If the price is high, producers will be willing to supply more of the good or service, while if the price is too low, producers may decide to reduce the supply in order to protect their profits.
3. Number of Sellers: The number of sellers in the market can also affect supply. For example, if there are more sellers in the market, competition will increase and this will usually lead to an increase in supply.
4. Technological Progress: Technological progress can also affect supply. If new technology is developed that makes producing a good or service more efficient, then the supply of that good or service will likely increase.
5. Government Policy: Government policy can also affect supply. For example, if the government sets a minimum wage, then the cost of labor will increase and this could lead to a decrease in the supply of goods and services.

Advantages of Factors affecting supply

There are many advantages that come with factors affecting supply. They include:

• Cost of Production - Cost of production is an important factor that determines the supply of goods and services. It includes the cost of raw materials, labor, and overhead costs. When these costs are lower, it makes it easier for businesses to produce more goods and services, which in turn increases supply.
• Prices - The price of goods and services affects the quantity that is supplied in the market. When prices are higher, businesses are willing to produce more goods or services to receive higher profits. On the other hand, if prices are too low, businesses will not have incentives to produce more.
• Number of Sellers - The number of sellers in the market affects the amount of goods and services available for sale. When there are more sellers, it increases competition between them and that leads to lower prices and higher availability of goods and services.
• Technological Progress - Technological advances have a big impact on supply. New technologies allow businesses to produce more goods and services with fewer resources, which increases the amount of goods and services available in the market.
• Government Policy - Government policy also affects the availability of goods and services. Governments can make policies that encourage businesses to produce more goods and services or policies that restrict the production of certain goods and services.

Limitations of Factors affecting supply

The limitations of factors affecting supply include:

• Cost of production: production cost is affected by the price of inputs, labour costs, taxes and other government policies. If the cost of production increases, it will reduce the potential supply of goods and services.
• Prices: the price of goods and services is determined by the demand and supply in the market. If the price of goods and services is too low, it could lead to an oversupply, while an increase in price could lead to a shortage of goods and services.
• Number of sellers: The number of sellers in the market affects the potential supply of goods and services. If there are too many sellers, it could lead to an oversupply and a decrease in profit, while too few sellers could lead to a shortage of goods and services.
• Technological progress: Technological progress has a major impact on the potential supply of goods and services. As technology advances, it can improve the efficiency and productivity of production, leading to an increase in the potential supply.
• Government policy: Government policies such as taxes, subsidies, and regulations can also affect the potential supply of goods and services. Government policies can increase or decrease the cost of production, leading to an increase or decrease in potential supply.

Other approaches related to Factors affecting supply

• Cost of production: The cost of production includes the cost of materials, labor, overhead, taxes, and other costs related to producing a good or service. It is the largest factor that affects supply as producers need to make at least a certain amount of profit for it to be worth producing.
• Prices: The price of a good or service affects the quantity supplied. If the price goes up, then more suppliers are likely to enter the market and supply more of the good or service. On the other hand, if the price drops, then suppliers may reduce their supply.
• Number of sellers: The larger the number of sellers, the more likely it is that there will be more supply of a given product. Therefore, the number of sellers is an important factor affecting the supply of a good or service.
• Technological progress: Technological progress can also affect supply. Advances in technology can lead to more efficient production methods, which can reduce the cost of production and increase the supply of a given product.
• Government policy: Government policies can also affect supply. For example, if the government imposes a tariff on imports, it can reduce the supply of a good or service from outside countries. On the other hand, subsidies can increase the supply of a certain product.

In summary, the main determinants of supply are cost of production, prices, number of sellers, technological progress and government policy. These factors all affect the amount of goods and services available at a given price and time.

References

• Katz, L. & Murphy, K. (1991). Changes in relative wages, 1963-1987: Supply and demand factors (No. w3927). National Bureau of Economic Research.
• Kilian, L. (2009). Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review, 99(3), 1053-69.
• Marshall A. (2009). Principles of Economics: Unabridged Eighth Edition. Cosimo Classics, New York
• Shulz E. (2005). The influence of supply and demand factors on aggregate health care expenditure with a specific focus on age composition. Enepri Research Report No. 16, Berlin
• Rumánková L., Smutka L. (2013). Global Sugar Market – The Analysis of Factors Influencing Supply And Demand. Acta Univ. Agric. Silvic. Mendelianae Brun. 2013, 61, 463-471

Author: Klaudia Szwajkosz