Factors Affecting Change in Supply

Supply of a commodity is a multi-valued function. It depends on a number ‘of variables. In case of change in supply, we keep price of the product constant and other non-price determinants are allowed to change. So a change in one, some or all the non-price factors can bring changes in supply. Below we discuss those factors which affect change in supply.

• Price of the Related Commodities

The supply of a commodity not only depends on its price, but also on the prices of its related commodities. For example, in case of substitutes like tea and coffee, a change in price of one affects the supply of the other. An increase in the price of tea may induce the coffee producers t produce tea instead of coffee. Here the supply of coffee falls, not due to a fall in its price but due to an increase in the price of tea. Similarly in case of complementary goods which are produced jointly, an increase in the price of the main product results in an increase in the supply of its by products.

• Change in the Factor Price

An increase in the price of the factors of production used in producing a product increases its production cost. It will reduce the profitability of the producer leading to a fall in the supply. Similarly a fall in factor prices will increase the supply of the product.

• Technique of Production

Change in technique of production is the most important factor influencing supply. An improvement in technique of production requiring sophisticated machinery and complex division of labour and specialization significantly increase the supply of goods. For instance production and supply of foodgrains rises rapidly if we cultivate with a tractor (modern technique) that with a wooden plough (traditional technique).

• Price Expectations

This is an important non-price determinant of supply. The supply of a product to a large extent depends on the future expectations of its price. For example, if the seller expect an increase in the price of their products in future, then they may store it (hoarding) by supplying less, in the opposite, when the sellers expect a fall in the price their products, they will try to exhaust the stock by supplying mote of it.

• Natural Factor

The supply of commodities also depends on the natural factors. For example, natural calamities like cyclone, flood, drought etc. reduce the supply of foodgrains and raw materials. Similarly a good and timely monsoon increases their supply.

• Government Policy

A change in government policy (taxation and subsidies) affects the supply of a product. For example, if government imposes heavy taxes on the production of a commodity, its production cost will increase. This will reduce the supply of the product. Similarly a grant of subsidy on a product increases its supply.

Besides the above factors, the economic condition, peace and stability of the economy also affect the supply conditions of a commodity.