Five Determinants of Supply
The supply of a commodity is determined by the following factors.
(1) Price of the commodity: Higher the price of the commodity, the producer will offer more quantities for sale in the market and vice-versa.
(ii) Prices of inputs: If the prices of inputs rise, the cost of production will rise and as a result the supply of the commodity falls. On the other hand, if the prices of inputs fall, cost of production declines and as a result the supply of the commodity increases.
(iii) Prices of other goods: Suppose if the price of good y rises, it will be more profitable to produce that good. And the supply of given good say X would fall.
(iv) State of technology: As a result profits tend to increase. This leads to increase in supply.
(v) Change in tax rates: An increase in the rate of tax on production increases the unit cost of production and consequently the supply decreases, On the other hand, if the tax rate on production is reduced, the cost of production is also reduced and as a result, supply increases.