Factors Influencing Supply

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Factors Influencing Supply

Price of the Good: As we have seen in the law of supply, there is a direct positive relationship between price of a good and its supply, i.e. the amount offered for sale in the market. At higher price more of the good is offered for sale than at a lower price. Thus, other things being equal, with rise in price, the quantity supplied increases; while with a fall in price, the quantity supplied decreases. Hence, price, there are many other factors that influence and determine the supply of goods in the market. Some of these other factors are discussed below:

State of Technology: Production is done with the help of factors of production, uiz., land, labor, capital, etc. These production factors, say labor, say labor and capital, can be combined in various proportions. The ratio in which these factors are combined is called technique of production or production technology. A labor intensive technique of more of labor is used in relation to capital. And if more capital (machinery, etc.)  Is used per unit of labor, this is called capital intensive technology. With the advancement of science, there are continuous changes in technology; new methods of production, a change in the capital labor ratio or a greater output from the same combination of labor and capital, are all examples of changes in technology. By these changes in production techniques or improvement in technology, the firm can produce more output at the same total cost, or the same output at a lower aggregate cost. If this happens, more of goods will be produced and supplied even at the same old price or the same amount of goods may be offered even at a lower price. Thus, changes in production technology are a major factor affecting supply of goods in the market.

Changes in input prices: Production, as we have seen, is a result of factor inputs or use of factors of production. The payments made to these factors or the expenses on factor inputs constitute the monetary cost or the money cost of production of the d\given volume of output. Now, if labor and capital are the only two factors of production used by a firm and that there is an increase in the wages of labor, other things beings equal the cost of production of this given quantity of output will increases. Consequently, the producers will not be able to sell the same quantity at the prevailing market prices. Since their production cost has gone up, same volume of output can be now offered only at a higher price. Thus, changes in factor prices have a strong influence on the supply of a good in the market.

Prices of Other Goods: Prices of other goods also affect the volume of production and supply of any good in the market. Thus, for example, now the farmers are producing a given quantity of wheat and also a given amount of pulses. If the price of wheat remains the same, but that of pulses rises, it would be more profitable to the farmers to produce a larger amount of pulses. For this, they may, in the next cropping season, devote more land area under cultivation of pulses and withdraw it from wheat cultivation. Consequently, the production and supply of wheat will drop without there being any change in its price. In other words, supply of wheat goes down even at the same price, because the producers have substituted pulses for wheat. This product substitution, wherein the producers like to produce a product whose price has gone up in place of the product whose price is now relatively low, is an important factor influencing supply.

Natural Factors: In case of some goods, particularly agricultural products, natural factors such as climate, fertility, floods, droughts, rainfall, etc., play an important role. While timely and good rainfall may increase output and supply, excessive rains and floods or dry spells and drought affect agricultural output adversely and thus cause reduction in supply.


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