Chapter-4 Supply Analysis Latest edition 2. What are the determinants of supply?

Balbharati solutions for Economics HSC 12th Standard Maharashtra State Board 

 

Chapter-4 Supply Analysis Latest edition

 

2. What are the determinants of supply?

Answer: - According to Paul Samuelson, “Supply refers to the relation between market prices and the number of goods that producers are willing to supply.’’

Supply refers to the quantity of a commodity that a seller is willing and able to offer for sale at a given price, during a certain period of time.

The following are the determinants supply of a commodity:

i. Price of commodity - Other things remaining constant, at higher prices, the producers prefer to increase their sales by increasing their supply and vice-versa.


ii. Price of related goods - A rise in the prices of substitute goods will lead to a decrease in the supply of other goods and vice-versa. On the other hand, a rise in the price of complementary goods will lead to an increase in the supply of other goods.


iii. Cost of production - If the price of inputs increases, the cost of production also increases, other things remaining the same. An increase in the cost of production decreases the profits of the supplier and, consequently, lesser quantity is supplied at the given price.


iv. State of technology - Other things remaining the same, if the level of available technology appreciates, the per unit cost of production goes down, which implies higher supply of output and vice-versa.


v. Government policy - Other things remaining constant, if the government policies are more stringent and strict such as high rate of tax, the cost of production will rise. The high cost of production will discourage the producer and thereby, supply will decrease.


vi. Goal of firm - If a particular firm aims at maximizing its profit, more units of output will be supplied at a higher prices, which will result in a higher profit. On the other hand, if the firm aims at maximization of sales, more of the output will be sold at the same price to maximize sales.


vii. Natural factors - Other things remaining the same, in the event of any natural calamity, such as an earthquake, flood, etc., the supply of output will fall.


viii. Government policy: Favourable Government policies may encourage supply and unfavourable government policies may discourage the supply. Government policies like taxation, subsidies, industrial policies, etc. may encourage or discourage production and supply, depending upon government policy measures.

ix. Future expectations about price: If the prices are expected to rise in the near future, the producer may withhold the stock. This will reduce the supply and vice versa.

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