Question

Discuss determinants of the supply curve. Remember to differentiate the effect of price as a separate determinant from all other non-price determinants and explain why.  Make sure to provide examples for the non-price determinants. Short answer!

Answer 1

Answer

The supply is determined by the price and non-price factors.

Price of a commodity and its supply : The supply of a commodity depends on its price. If the price of the commodity rises, then the supply of the commodity also rises and vice versa. When the price of a commodity rises, if the producers supply more, the it raises their revenue ( quantity supply * price ). The rise in revenue raises the profit (revenue - cost of production). So supply of a commodity is positively related with the price.

Figure-1

In figure-1, quantity supply (Q) is measured on the horizontal axis, and the price of the commodity is measured on the vertical axis. 'SS' is the supply curve which is positively sloped. 'Q₁' is the quantity supply at price 'P₁'.

Non-price determinants of supply : Among the non-price determinants of the supply and hence the supply curve, some are as follows:

a) Technology of production : The improvement of the technology of production decreases the average cost of production and the firm observes the increasing returns to scale.So the improvement of technology increases the production and thus the supply of the goods.It shifts the supply curve to the rightward.

b) Tax and subsidies by government : The imposition of indirect tax changes the cost of production and thus the output . So the supply changes.The increase in the tax increases the cost of production . This decreases the production and thus decreases the supply. So the supply curve shifts leftward. The decrease in indirect tax decreases the cost of production and thus increases the supply. So the supply curve shifts leftward.

On the other hand, the government subsidies to producers decreases the cost of production and thus supply increases.So the government subsidies to producers shifts the supply curve rightward.

c) Input and factor prices :The rise in input and factor prices increases the cost of production and thus reduces the production.So the supply declines.Therefore the supply curve shifts leftward.

d) Expectations of the sellers :If the producers or the sellers expect that for a particular good, the demand may rise in near future,they will increase the supply of that good to reap the profit.So the supply curve will shift to the rightward.

Example : The demand for wine rises in winter season. So the supply of wine rises and thus supply curve of wine shifts rightward.

e) Number of sellers in the market : If the seller of a particular commodity rises in the market,the supply of that commodity will rise and thus shifts the supply curve to the rightward. When the opposite happens, it shifts the supply curve to the leftward.

f) Price of the related goods : If the producer with his available or given resources produces two commodities, and if the price of one of the commodities rises, then it will be profitable for the producer to produce that commodity. So the producer will then produce more of that commodity and the less of other commodity.The rise in the production of the commodity whose price rises, will raise the market supply and thus shifts the supply curve to the rightward. The decrease in the production of other commodity will decrease its supply and thus shifts the supply curve to the leftward.

This phenomenon is mainly evident in the agricultural sector, where the farmer produces two or three crops in his/her land.

g) Weather and season :The agricultural sector is season and weather dependent. The high rainfall or no rain both are harmful for the agricultural sector that affects the production of crops. This in turn affects the supply of the crops. Thus decrease in the production of crops decreases the supply of crops and thus shifts the supply curve to the leftward.On the other hand, the good monsoon increases the production of crops and thus increase the supply of crops. It shifts the supply curve to the rightward.

Figure-2

The figure-2 shows how the non-price factors discussed above shifts the supply curve. The rise in the supply shifts the supply curve to the rightward at the given price level and the decrease in supply due to any non-price factors shifts the supply curve to the leftward at the given price level.

So, the change in price changes the quantity of supply on the same supply curve. The change in non-price factors shifts the supply curve either rightward (rise in supply) or leftward (fall in supply) at the given price level.

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