Determinants of Market Supply

The following article has been adapted from FME Articles, a partner organization of Finance OneforOne. To read a longer version of this article, click here.

Before we start: changes in prices do not change market supply. Changes in supply (caused by either of the 4 determinants below) can either cause businesses to sell more of a product at the same price or sell less of a product at the same price.

1. Cost/Availability of Factors of Production ( Price)

Since the manufacturing process of a good requires the utilization of land, labor, and/or capital, producers seek to purchase them at the lowest cost possible. When producers are able to spend less on the production of a product, they fabricate more products with the same expenditure, causing supply to increase. Nevertheless, due to extraneous reasons, the price of inputs may rise, causing producers to fabricate fewer products with the same expenditure. As a result, the supply curve shifts up to the left (supply decreases). ​

2. Changes in Technology

As technology develops, the complexity of producing certain products is alleviated. This reduced complexity can allow more products to be fabricated in reduced time and/or more products to be fabricated using fewer resources. Regardless, the production rate will increase, thus increasing supply.

3. Taxes or Subsidies

The government plays a significant role because of its power to tax or subsidize. Taxes When the government taxes a type of product, the cost to produce it goes up. As a result, it costs more to generate the same product, causing supply to decline. Subsidies When the government subsidizes a product, the cost to produce it goes down. Consequently, producers can spend less to produce the same product.

4. Producer Expectations

Besides consumer expectations, producers also have expectations of what they think might occur in the market. If producers believe that they can make more profit on their product a few weeks from now, they’ll supply less now but more later. This is logical because producers will want to save their products until they can make more profit for the same number of products sold.