Demand and Supply are the two main concepts of business economics. As we know the demand is the total amount of commodity at which consumers are willing and able to purchase it whereas supply refers to the quantity of good or services the sellers are ready to sell. In this article, we will understand the meaning of supply and its determinants.
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Meaning of supply refers to that amount or quantity of a good/ service which the market participants are ready to sell in the market to the consumers at given prices for a given period of time.
A commodity can be said as supplied when
- it is ready to sell in the market but not yet sold.
- it is related to a given period of time.
According to Thomas,
“The supply of goods is the quantity offered for sale in a given market at a given time at various prices.”
Example of the meaning of Supply: –
A book Seller has 70 books of Business Economics for class 11th and 80 books of the same subject for class 12th at his shop and he is ready to sell them. So the total supply of the material is equal to 150(70+80) books.
It refers to the factors which influence the supply of a particular commodity during a given period of time. These factors directly or indirectly affect the supply of a commodity in the market. This can be written as :
These factors derive the supply of the commodities and also, growth of the economy providing other things remain the same. the organization should understand the impact of these determinants of supply. Some of these are explained as under :
Price of the Commodity :
It is the most important determinant. It affects the supply at a large extent. As per the law of supply, there is a positive relationship between the price of a commodity and supply. The supply of a commodity increases with a rise in price, assuming other things constant, and vice versa.
the supply of mangoes initially derives from the climate that is ideal for growing mangoes. As the price increases, farmers will start growing it in less friendly climate raising the supply at more costs.
Supply of a good or service is affected by the price of related goods. these related goods include :
Substitute goods are those which can be used in place of each other giving equal satisfaction to the consumers e.g. wheat and rice, tea and coffee etc. There is an indirect relationship between the price of substitute goods and supply of the given commodity, other things being constant and vice versa. It implies that as the price of substitute goods increases, the supply of given commodity starts declining.
If the price of coke rises, it will result in more supply of coke as it becomes more profitable for firms to supply coke instead of limca. Thus, an increase in the price of coke leads to a fall in the supply of limca.
b) Joint Products:
Joint products are those which are produced from a single production process to satisfy the needs of consumers e.g. production of butter and cheese from milk, different grades of wood and tree etc. There is a direct relationship between the price of joint products and the supply of the given commodity, other things remain the same and vice versa. It implies that as the price of joint products increases, the supply of given commodity starts increasing.
If the price of milk increases, it will result in more supply of milk and further, the prices of cheese and butter also increase.
Prices of Factors of Production:
The cost of production depends on various factors like :
a) Price of raw material
b) Rent and interest on capital
c) Cost of machinery
d) Wages and salaries
e) Transportation cost
The increase in the price of any of these increases the production costs thus lessens the overall profits and vice versa. Since profit works as a major incentive for suppliers to supply goods and services, profits and supply go hand in hand. The increase in profits leads to more supply and decrease in profits reduces the supply. In other words, profits and supply are directly related to each other.
Expectations of Sellers :
If the price of a commodity is expected to rise in future, the producers prefer to withhold more with them to benefit from higher prices in future, reducing the supply now. For Example, if it is expected that the price of wheat is going to rise, the farmers would retain their agricultural production with them to get benefit from the high price in future, lowering the supply now.
Similarly, if there is an expectation that the prices are going to fall in the near future, the suppliers would increase the supply now to eliminate losses in future. Thus, price expectations also make a significant impact on the supply by the suppliers.
Improvement in technology like technological innovations and inventions enables more efficient and better quality of production of goods and services. More efficiency brings more profits with a reduction in production costs. As a result, supply is increased. Thus, the state of technology increases or decreases the supply of particular products.
Taxation and Subsidies :
The government policy also affects the supply of commodity at a large extent. The commodity taxes like excise duty, import duties and GST etc. imposed by the government increases the overall cost of production. Hence, the increase in cost lowers the profit and supply of the given commodity. Similarly, subsidies decrease the overall cost of production and lead to more profits and increase in supply.
Number of Sellers:
The number of sellers affects the market supply. As market supply is defined as the sum of the supply of each individual supplier, thus, more and more sellers entering the market leads to more supply. Similarly, departing the market leads to less supply in the market.
Other Factors :
There are many other factors which affect the supply of goods and services like the goal of the firm, infrastructural facilities including transportation and communication services, market structure and other factors etc.
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