Supply of a commodity refers to the quantity of a commodity which producers or sellers are willing to produce and offer for sale at a particular price during a particular period of time.
How much quantity of a commodity an individual firm or all the firms are willing to produce and offer for sale during a specified period is affected by a variety of factors. The main determinants of supply of a commodity are :
- Price of the commodity – The most important determinant of the supply of commodity is its own price. Given other things, larger quantity of a commodity will be supplied at a higher price and smaller quantity will be supplied at a lower price. This will be so, as higher the price, given the per unit cost of production, higher is the per unit profit. The higher profit would motivate the firms to supply more, so that they can earn higher profit.
- Goals of the firm – The goals or objectives of the firms also determine the supply of a commodity. The goals of the firms may be profit maximization, risk minimizer or sales maximization. Ordinarily, most of the firms try to earn maximum profits. This is the reason, it is assumed in economic theory that the objective of the firm is to maximize profit. Higher is the profit from the sale of a commodity, higher will be the amount supplied by the firms and vice – versa. At, times, the firms may aim to maximize the sales or revenue rather than the profits. They may like to maximize the sales in order to acquire status and prestige in the society or to dominate the market. If the firms aims to maximizing the sale, they may produce and sell more than the profit – maximizing output. Similarly, if the firms at minimizing the risk, they will play safe and produce and supply a smaller quantity of the commodity.
- Input prices – Factors influencing the level of supply of a commodity is the prices of inputs, or factors used in production, like raw materials, machine, labor, etc. If the produces have to pay high price to secure the factors of production need for producing the commodity, its cost of production will be high. Given the price of the commodity, a higher cost of production reduces the profit margin. This will lead to a lower amount of output that the firms will produce and offer for sale at a given price level. A fall in the input prices and therefore, a fall in cost of production will have the opposite effect on supply.
- Prices of related commodities – supply of a commodity depends upon the prices of related goods, mainly the substitute goods. Producers always have the possibility of shifting from the production of one commodity to the production of another commodity. If the prices of other commodities are rising, while the prices of the commodity under question remains constant, producers will find it more profitable to produce and sell other commodities. As a result, the supply of the commodity under question will fall. For example, a farmer can grow a variety of vegetables on a given piece of land. If the market price of peas rises, farmers will produce and supply more peas at the cost of other vegetables by diverting resources from the production of other vegetables to production of peas.
- Techniques of production – techniques of production also exert a significant influence on the supply of a commodity. An improvement in the technique of production, the invention of new machines and advanced techniques reduce the cost of production and increase the profit margin. Increased profitability induces the producers to produce more and increase the supply.
- Nature of the commodity – the supply of a commodity also depends on whether the industry is monopolized or competitive. In case of monopoly, one firm produces the entire commodity. A monopolistic firm will like to restrict the output so as to raise the market price. But there is competition among firms, there will be no tendency to restrict the output. Thus the competitive firms are likely to produce and sell more as compared to monopolized industry.
- The policy of taxation and subsidies – the taxation policies of the government also influences the supply of a commodity. Indirect taxes like taxes imposed on commodities like sales tax, excise duty, etc. are likely to increase the price of the commodities. The imposition of heavy taxes on a commodity is likely to cause an increase in its production and therefore, it will generally lead to a decrease in supply. A reduction of taxation will have an opposite effect. It will motivate the producers to increase the supply. Subsidies also effect the supply of the commodity. The government pays subsidies to firms to produce certain goods. These subsidies will reduce the costs and induce the producers to increase supply.
- Expectation about future prices – the expectation of the producer about future market prices affects the supply of any good. If the producers expect an increase in the price of a commodity in future, then they will supply less today and hoard it as to offer a large quantity of commodity in future at a higher prices. Conversely, expectations about fall in future prices, tend to increase supply.
- Natural factors – natural factors are particularly important for the supply of agricultural products. Natural factors include flood, drought and any kind of unfavorable climatic conditions, etc. When these adversely effect the supply of commodities. Heavy rains, flood and drought conditions will lead to decrease in supply of agricultural commodities. Proper rain and favorable climate conditions may help increasing the supply of agricultural commodities.
- Agreement among producers – sometimes the producers may form a group and enter into some agreement to restrict the supply of a commodity to earn large profits. This way an artificial scarcity of the commodities is created and as a result, supply will decrease.
- Availability of transport and communication facilities – the supply of a commodity depends upon the types of transport and communication facilities. An improvement in the transport and communication facilities will expand the size of the market, which would encourage the producers to supply more.