Determinants of Supply
Supply is a crucial aspect of economics, and therefore economists must recognize real-world situations that impact the supply curve.
Before discussing the determinants, it is imperative to understand that price is NOT a determinant of supply. Determinants include all factors besides price that affect the supply curve.
Price is not a determinant because a determinant shifts the entire curve left or right; however, when price changes, supply merely moves along the same curve. In other words, price is the points of a curve, whereas determinants are the reason why those points are what they are. By the end of this article, this will all make sense.
In supply, the determinant can either cause suppliers to sell more of a product at the same price or sell less of a product at the same price.
Notice how the determinants are changing the supply without changing the price? This explains why price is not a determinant.
Before discussing the determinants, it is imperative to understand that price is NOT a determinant of supply. Determinants include all factors besides price that affect the supply curve.
Price is not a determinant because a determinant shifts the entire curve left or right; however, when price changes, supply merely moves along the same curve. In other words, price is the points of a curve, whereas determinants are the reason why those points are what they are. By the end of this article, this will all make sense.
In supply, the determinant can either cause suppliers to sell more of a product at the same price or sell less of a product at the same price.
Notice how the determinants are changing the supply without changing the price? This explains why price is not a determinant.
The Supply Curve
When the determinant causes the supply curve to shift down to the right (supply increases), producers will sell more of the product at any given price. On the contrary, when the determinant causes the supply curve to shift up to the left (supply decreases), producers will sell less of the product at any given price.
The supply curve is always positive.
The supply curve is always positive.
The 5 Determinants of Supply
1. Cost/Availability of Factors of Production (Inputs Price)
In order to produce a good or service, producers must utilize at least one factor of production. Click here for a comprehensive article about factors of production. However, of the 4 factors of production, only land, labor, and capital impact the supply curve.
Since the manufacturing process of a good requires the utilization of land, labor, and/or capital, producers seek to purchase them at the lowest cost possible. When producers are able to spend less on the production of a product, they fabricate more products with the same expenditure, causing supply to increase.
Nevertheless, due to extraneous reasons, the price of inputs may rise, causing producers to fabricate fewer products with the same expenditure. As a result, the supply curve shifts up to the left (supply decreases).
Besides the price of inputs, the availability of inputs also impacts supply. More goods are contrived when the availability of an input increases, causing supply to increase. This relationship applies when the availability decreases as well.
Since the manufacturing process of a good requires the utilization of land, labor, and/or capital, producers seek to purchase them at the lowest cost possible. When producers are able to spend less on the production of a product, they fabricate more products with the same expenditure, causing supply to increase.
Nevertheless, due to extraneous reasons, the price of inputs may rise, causing producers to fabricate fewer products with the same expenditure. As a result, the supply curve shifts up to the left (supply decreases).
Besides the price of inputs, the availability of inputs also impacts supply. More goods are contrived when the availability of an input increases, causing supply to increase. This relationship applies when the availability decreases as well.
2. Changes in Technology
As technology develops, the complexity of producing certain products is alleviated. This reduced complexity can allow more products to be fabricated in reduced time and/or more products to be fabricated using fewer resources. Regardless, the production rate will increase, thus increasing supply.
An example of advanced technology is the use of machines. During the industrial revolution, efficient machines were introduced, which increased productivity substantially.
An example of advanced technology is the use of machines. During the industrial revolution, efficient machines were introduced, which increased productivity substantially.
3. Taxes or Subsidies
The government plays a significant role because of its power to tax or subsidize.
Taxes
When the government taxes a type of product, the cost to produce it goes up. As a result, it costs more to generate the same product, causing supply to decline.
For instance, if the government taxes headphones, producers’ expenditures will increase when manufacturing the same number of headphones. Producers will then carry their increased expenses to consumers by decreasing supply. Since supply is decreased, producers will be willing to sell fewer headphones at any given price. Therefore, consumers will have to purchase headphones at a higher price.
The information above shows us that government taxes decrease supply.
Subsidies
When the government subsidizes a product, the cost to produce it goes down. Consequently, producers can spend less to produce the same product.
For instance, if the government subsidizes farmers’ crops, farmers will be able to grow more crops for the same amount of money. Since farmers will be making more profit on each crop, they will be incentivized to produce more crops, causing supply to increase.
Click here for a comprehensive article about incentives.
The information above shows us that government subsidies increase supply.
Taxes
When the government taxes a type of product, the cost to produce it goes up. As a result, it costs more to generate the same product, causing supply to decline.
For instance, if the government taxes headphones, producers’ expenditures will increase when manufacturing the same number of headphones. Producers will then carry their increased expenses to consumers by decreasing supply. Since supply is decreased, producers will be willing to sell fewer headphones at any given price. Therefore, consumers will have to purchase headphones at a higher price.
The information above shows us that government taxes decrease supply.
Subsidies
When the government subsidizes a product, the cost to produce it goes down. Consequently, producers can spend less to produce the same product.
For instance, if the government subsidizes farmers’ crops, farmers will be able to grow more crops for the same amount of money. Since farmers will be making more profit on each crop, they will be incentivized to produce more crops, causing supply to increase.
Click here for a comprehensive article about incentives.
The information above shows us that government subsidies increase supply.
4. Competition
Contrary to what many think, a competitive market increases supply rather than decreasing it. A greater level of competition implies that more producers are producing the same products. As a result, there is more supply.
Furthermore, since all producers want consumers to buy products from them, they will lower their prices and increase their quality in an attempt to attract more customers. Thus, competition is imperative in markets: lower prices and higher quality.
Furthermore, since all producers want consumers to buy products from them, they will lower their prices and increase their quality in an attempt to attract more customers. Thus, competition is imperative in markets: lower prices and higher quality.
5. Producer Expectations
Besides consumer expectations, producers also have expectations of what they think might occur in the market. If producers believe that they can make more profit on their product a few weeks from now, they’ll supply less now but more later.
This is logical because producers will want to save their products until they can make more profit for the same number of products sold.
For instance, if producers believe that they will generate 10% more profit on each water bottle six weeks from now, they will supply fewer water bottles now. Then, when the water bottle market becomes more expensive, producers will supply more water bottles so that they make more profit.
This is logical because producers will want to save their products until they can make more profit for the same number of products sold.
For instance, if producers believe that they will generate 10% more profit on each water bottle six weeks from now, they will supply fewer water bottles now. Then, when the water bottle market becomes more expensive, producers will supply more water bottles so that they make more profit.
2 Crucial Things to Remember
- The supply curve does not shift due to price changes. The only way the curve can shift is if at least one of the determinants discussed above occurs. Price only resembles the points on the curve. Meanwhile, the determinants change the supply for every given price. In other words, for every given price, the quantity supplied will be different.
- In every scenario, only one curve can change. Both the supply and demand curves can never change at the same time. Hence, the determinants for supply and demand vary. Click here to learn about the determinants of demand.
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