DETERMINANTS OF SUPPLY

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When price changes, quantity supplied will change. That is a movement along the same supply curve. When factors other than price changes, supply curve will shift. Here are some determinants of the supply curve.

 

1. Production cost:

Since most private companiesí 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.

 

3. Number of sellers:

More sellers in the market increase the market supply.

 

4. Expectation for future prices:

If producers expect future price to be higher, they will try to hold on to their inventories and offer the products to the buyers in the future, thus they can capture the higher price.

 

Review:

A change in quantity supplied is caused by a change in its own price of the good.

A change in supply is caused by a change in determinants.

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