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Determinants of Supply

Prices of Resources

❶Likewise, the sum of the supply curve of each supplier is equal to the market supply.

Supply Determinants

Number of Sellers
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Market Supply

The reduction in the production cost through technology will increase profits. Therefore, the supply increases and the supply curve will shift rightwards. Technology rarely deteriorates and it ensures the business remains efficient therefore a constant supply of the goods and services.

When the number of sellers is high in a certain market, the quantity of product or service supplied to that market will be high and vice versa. Therefore, an increase in the number of sellers in a market will decrease the supply and the supply curve shifts leftwards. An example is a situation where more companies enter into an industry, this will increase the number of sellers, and therefore supply will increase as well.

Changes in the expectations of the suppliers about the future price of a service or a product may affect the current supply. However, unlike the other determinants of supply, the expectations of the supply can be quite difficult to generalize. For example, when farmers anticipate that the price of the crop will increase. This will cause them to withhold the produce to benefit from a higher price. This, in turn, reduces the supply and in the context of manufacturers when there is an expected increase in price then they will employ more resources to increase the output.

An increase in the prices of the inputs will increase production costs. This one is tricky, but imagine that you can make both tacos and fuel with corn. If you are a taco producer, then fuel is a substitute in production. If the price of fuel goes up, then you are more likely to produce fuel than tacos, so a decrease in the supply of tacos would occur Sl.

But if fuel suddently becomes cheaper, it is now better to produce tacos, so we will see an increase in the supply of tacos Sr. Number of firms in the market: This determinant leads us to the conclusion that competition is better for the market. As we see more and more firms enter the market, more and more of the good in question gets produced.

So an increase in the number of firms gives us an increase in supply Sr , while a decrease in the number of firms gives us a decrease in supply Sl. The expected future price of the product: This has to deal with hoarding behavior. If everyone expects the price of gold to be higher in the future, they will sell less of it now to take advantage of higher future prices. This causes a decrease in supply Sl. However, if people expect the price of houses to drop in the future, then everyone will want to sell today, which will result in an increase in supply Sr.

Tags econ help law of supply microeconomics. Newer Post Older Post Home. Ask a question search this site. Common Topics algebra 34 economics 50 glossary 25 macroeconomics 57 microeconomics supply and demand How to calculate marginal costs and benefits from total costs and benefits , and how to use that information to calculate equilibrium.

At many points in the semester you will be asked to calcula Constructing a PPF and calculating opportunity costs. This post goes over the economics of PPF construction and opportunity cost calculations, for more info on the theories behind this check If resource prices increase faster than supply prices, then producers will have less incentive to produce more.

Likewise, when resource prices fall, then profits increase for the same price level, so sellers will produce more. A similar analysis can be applied to taxes and subsidies , since taxes decrease and subsidies increase the profits of suppliers.

Improvements in technology can reduce the need for factors of production in supplying a product. For instance, robotics have greatly reduced the need for labor. More fuel-efficient aircraft allows airlines to sell seats for less, thereby increasing demand. Technology can also reduce distribution or marketing costs. For instance, the cost of distributing electronic books is virtually zero. Prices of other goods will also affect the production of any one good.

If a business can produce more than one type of product with its equipment and labor, then it will tend to produce more of those things for which it receives a higher profit and less of the other things. For instance, a farmer can produce a large number of products on a farm. Hence, the farmer will allocate increased acreage for products yielding the highest profits.

Since the farmer has only so many acres of land, devoting more land to grow one type of food will leave less land to grow other types. Such a substitution production will reduce the supply of the other items that the farmer can provide.


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Since most private companies’ goal is profit maximization. Higher production cost will lower profit, thus hinder supply. Factors affecting production cost are: input prices, wage rate, government regulation and taxes, etc. 2. Technology: Technological improvements help reduce production cost and increase profit, thus stimulate higher supply.

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There are generally 5 accepted concepts that can lead to a change in supply (a shift in the supply curve). These are: input prices, productivity, the price of a substitute in production, the number of firms in a market, the expected future price of the product.

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Determinants of supply are the factors that affect the supply of a product or service and that cause a shift in the supply curve. However, these factors are held constant (according to the law of supply) to alleviate the effect of the law of supply especially with relation with quantity supplied and the supply price. Expectations as a Determinant of Supply Just as with demand, expectations about the future determinants of supply, meaning future prices, future input costs and future technology, often impact how much of a product a firm is willing to supply at present.

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Start studying Determinants of Supply. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Determinants of supply (also known as factors affecting supply) are the factors which influence the quantity of a product or service supplied. We have already learned that price is a major factor affecting the willingness and ability to supply.