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Determinants of supply, what shifts a supply curve?

Supply Determinants

❶The law of supply states that the supply increases as the price increases, and falls when prices fall.

Number of Sellers

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Market Supply
Prices of Resources

Thus increase in number of sellers will increase supply and shift the supply curve rightwards whereas decrease in number of sellers will decrease the supply and shift the supply curve leftwards. For example, when more firms enter an industry, the number of sellers increases thus increasing the supply.

Increase in resource prices increases the production costs thus shrinking profits and vice versa. Since profit is a major incentive for producers to supply goods and services, increase in profits increases the supply and decrease in profits reduces the supply. In other words supply is indirectly proportional to resource prices. Increase in resource prices reduces the supply and the supply curve is shifted leftwards whereas decrease in resource prices increases the supply and the supply curve is shifted rightwards.

Taxes reduces profits, therefore increase in taxes reduce supply whereas decrease in taxes increase supply. Subsidies reduce the burden of production costs on suppliers, thus increasing the profits. Therefore increase in subsidies increase supply and decrease in subsidies decrease supply.

Improvement in technology enables more efficient production of goods and services. Thus reducing the production costs and increasing the profits. As a result supply is increased and supply curve is shifted rightwards.

Since technology in general rarely deteriorates, therefore it is needless to say that deterioration of technology reduces supply. Change in expectations of suppliers about future price of a product or service may affect their current supply. However, unlike other determinants of supply, the effect of suppliers' expectations on supply is difficult to generalize. For example, when farmers anticipate that the price of the crop will increase. This will cause them to withhold the produce to benefit from a higher price.

This, in turn, reduces the supply and in the context of manufacturers when there is an expected increase in price then they will employ more resources to increase the output. An increase in the prices of the inputs will increase production costs.

This will, in turn, shrink the profits. Since profit is a major incentive the producers supplying goods and services to a certain market will increase, the production of service or product when there is low production costs and vice versa.

An increase in the price of the inputs will reduce the supply of the commodity, the supply curve will shift leftwards, and a decrease in the price of inputs the price increases and the supply curve will shift rightwards. Companies which manufacture related products, such as detergents, will shift their production to a particular product if that product is manufactured in large quantities. It increases the price, and there will be a reduction in supply.

An example is a firm that produces soccer balls and basketballs, when the price of soccer balls increases the firm will produce more soccer balls and less of basket balls, this means that the supply of basketballs will reduce. High taxes reduce profits because the suppliers will have to pay huge bills to cater for their production. Subsidies, on the other hand, reduces the cost of production, and the suppliers can gain profits by selling the product or service.

An increase in subsidies will increase supply and a decrease in subsidies will decrease supply in the same manner. Entrepreneur, independent investor, instructor and a visionary of my team here.

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So what are the determinants of supply?

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Since most private companies’ goal is profit maximization. Higher production cost will lower profit, thus hinder supply. Factors affecting production cost are: input prices, wage rate, government regulation and taxes, etc. 2. Technology: Technological improvements help reduce production cost and increase profit, thus stimulate higher supply.

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There are generally 5 accepted concepts that can lead to a change in supply (a shift in the supply curve). These are: input prices, productivity, the price of a substitute in production, the number of firms in a market, the expected future price of the product.

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Determinants of supply are the factors that affect the supply of a product or service and that cause a shift in the supply curve. However, these factors are held constant (according to the law of supply) to alleviate the effect of the law of supply especially with relation with quantity supplied and the supply price. Expectations as a Determinant of Supply Just as with demand, expectations about the future determinants of supply, meaning future prices, future input costs and future technology, often impact how much of a product a firm is willing to supply at present.

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Start studying Determinants of Supply. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Determinants of supply (also known as factors affecting supply) are the factors which influence the quantity of a product or service supplied. We have already learned that price is a major factor affecting the willingness and ability to supply.