What factors determine supply or supply function?

Factor determining supply or supply function are:

1. Price of the commodity: When the price of a commodity in the market rises, seller increases the price. The cost of production remaining constant the higher will be the profit margin. This will encourage the producers to supply more at higher prices. The reverse will happen when the price fall.

2. Goals of the firm : Firms may try to work on various goals for eg. Profit maximization, sales maximization, employment maximization. If the objective is to maximize profit, then higher the profit from the sale of a commodity, the higher will be the quantity supplied by the firm and vice-versa. Thus, the supply of goods will also depend upon the priority of the firm regarding these goals and the extent to which it is prepared to sacrifice one goal to the other.

3. Input Prices : The supply of a commodity can be influenced by the raw materials, labour and other inputs. If the price of such inputs rise leading to a lower profit margin becomes less. This will ultimately lead to a lower supply. On the other hand, if there is a fall in input cost firm, will be ready to supply more than before at a given price level.

4. State of Technology : If improved and advanced technology is used for the production of a commodity, it reduces its cost of production and increases the supply. On the other hand, the supply of those goods will be less whose production depend on unfair and old technology.

5. Government policies : The impostion of sales tax reduces supply and grant of subsidy on the other hand increases the supply.

6. Expectation about future prices : If the producers expect an increase in the price of a commodity, then they will supply less at the present price and hoard the stock in order to sell it at a higher price in the near future. This will be opposite in case if they anticipate fall in future price (eg. fruit seller)

7. Prices of the other commodities : Usually an increase in the prices of other commodities makes the production of that commodity whose price has not risen relatively less attractive we thus, expect that other things remaining the same, the supply of one commodities falls as the price of other goods rises. For eg. suppose a farmer produces wheat and pulses in his firm. If the price of pulses increases he grows less wheat. Hence the supply of wheat decrease.

8. Number of firms in the market : Since the market supply is the sum of the suppliers made by individual firms, hence the supply varies with changes in the number of firm in the market and increases the supply. An decreases in the number of firm reduces the supply.

9. Natural factor : In case of natural disorders flood, drought, etc. the supply of a commodity specially agricultural products is adversely affected.