FACTORS INFLUENCING SUPPLY
The quantity of goods supplied varies from time to time. The following are some of the factors that make supply to fluctuate (increase or decrease).
- Improved Technology: This is the most important factor that affects supply. If there is a change in the technique of production, like adoption of modern technique of production, installation of a very large modern machine and a better organization system, a very large quantity can be produced within a short period of time. Thus a larger quantity can be supplied to the market even though price of the commodity has not changed (increased).
- A change in cost of production: An increase in cost of production, especially that of labour and raw materials, reduces profit of producers. This compels them to reduce output; and they supply less to the market. While a decease in cost widens profit margin of producers. This motivates (encourages) producers to increase output and they supply more to the market.
- A change in number of producers: An increase in number of producers of a commodity causes a rise in output and supply. While a decrease in their number reduces output; and a small quantity is supplied to the market.
- Change in price: If there is a sudden rise in a price of a commodity, producers then increase production output in order to reap more profit. This increases supply. However if there is a sudden drastic fall in the price of the commodity, and this causes either meagre (small) profit or a loss, producers reduce output and supply falls. Also an increase in prices of other (similar) goods leading to increase in their profits may induce producers to switch to their production. This increases their supply but it may reduce the output and supply of the major product.
- A change in demand/expectation of future rise in demand: All things being equal, an increased demand causes a rise in sale. And this makes producers and sellers to offer more quantity to the market. Secondly, expectation of future rise in demand, like period of Christmas and resumption of schools, encourages producers to increase supply. While a total fall in demand, especially during economic slump (period of low demand especially total fall in demand) discourages producers from increasing production output. And this causes a decrease in supply.
- Government policy: A government may legislate (make law) against production of certain commodities, place ban on the importation of some goods, impose taxes (excise and import duties) on some items, and may adopt price control measure, etc. These actions reduce profit of both producers and sellers. They are therefore discouraged, and they are compelled to reduce output and quantity supply. Conversely, the government may introduce subsidy (pay for a part of cost of production), lift ban on restricted goods and raw material, involve in mass importation, credit expansion drive – lowering the interest rate, reducing excise and import duties, etc. These reduce cost of production, and it leads to more profit. It encourages producers and sellers to offer a very large quantity to the market.
- Weather’s effects: Agricultural products are subject to the vagaries of the weather. That is, they are affected by poor climatic condition (bad weather). This makes output and supply to fall.
- Prices of related (other) goods: If a price of a substitute e.g. yam rises, its demand will fall as consumers will switch to the purchases of a similar good like plantain whose price remains constant. This decreases the supply of yam but it increases the supply of plantain. If the price of a complementary good, e.g. sugar, rises, it lowers its demand as well as demand for tea. This makes the supply of tea to fall.
- Access to more capital: If a producer has access to (able to get) more capital, he increases production output, This makes him to supply more to the market.
- Level of income: The higher the level of income in a society, the higher the level of demand for almost all goods and services. And this motivates (encourages) producers to increase production output and supply more to the market.