Factors affecting supply

Factors affecting supply
See also
Factors affecting demand Change In Supply Price Wholesale price Factors affecting pricing Economic situation Sales potential Factor of production Autonomous Investment

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

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