Definition: Determinants of supply are factors that may cause changes in or affect the supply of a product in the market place.
What Does Determinants of Supply Mean?
These factors include:
1. Production technology: an improvement of production technology increases the output. This lowers the average and marginal costs, since, with the same production factors, more output is produced.
2. Prices of production factors: a rise in the price of one or more production factors leads to an increase in the production costs and vice versa.
3. Prices of other products: the supply of a product may be influenced by the prices of other products, especially if the products are complementary.
4. Number of production units: as the number of production units increases, the total supply of a product increases and vice versa.
5. Government policies: when taxes increase, the quantity supplied decreases because the cost of production increases. When subsidies increase, the quantity supplied increases because the cost of production decreases.
6. Expectations of producers: if producers expect a rise in the price of a product, they are likely to lower the quantity supplied and wait until the price goes up to sell the product at a higher price.
7. Random, natural, and other factors: the supply of agricultural products is influenced by natural phenomena and the weather conditions. Other factors affecting supply can be extended strikes, floods, political instability etc.
Let’s look at an example.
Company ABC is a leading producer of cereals, including wheat, rice, oats, and barley. Over the last year, the company focuses mainly on the production of rice and oats because their price is high, therefore increasing the profitability of the company. What should the company do if the price of wheat increases?
Wheat is a complementary product to rice and oats. Therefore, if the price of wheat increases, the quantity supplied of other cereals will most likely decrease, because the producers like company ABC will use their production factors for the production of wheat, seeking profit maximization.