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5 Factors That Affect Supply

Updated: Feb 24


In economics, Supply is a fundamental concept that describes the total amount of a specific good or service that is available to consumers. Consumers express their interest in purchasing a good or service and exhaust available supply, which will generally result in an increase in demand.


1. Supply curve


The supply curve is a graphic representation of the correlation between the cost of a good or service and the quantity supplied for a given period. The supply curve will move upward from left to right, as explained in the law of supply: As the price of a given commodity increases, the quantity supplied increases (all else being equal). When the prices of goods and services decline, the supply of goods and services will then decrease.


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2. Factors affecting supply


Supply can be influenced by a number of factors that are termed as determinants of supply. Generally, the supply of a product depends on its price and other variables such as the cost of production.


a. Price


Price can be understood as what the consumer is willing to pay to receive a good or service. This is the main factor that influences the supply of a product. In the law of supply, when the price of a product goes up, the supply of the product also increases and vice versa. This is considered as the variation in the price. However, if there is any speculation of a rise in the price of the product, it is typical that the supply in the present market would drop in order to gain more profit in the future. That also indicates that if the price is expected to decrease, the supply in the current marketplace would strongly increase.


Besides that, the price of substitutes and complementary goods could also affect the supply of a product. For example, if the price of wheat increases, the farmers would tend to grow more wheat than rice. This would potentially decrease the supply of rice in the market. Overall, price is a factor that affects a product’s supply the most.



b. Cost of production


The supply of a product and the cost of production is adversely related to each other. For companies, if the cost of production increases, the supply of product would shrink so as to save the resources. For example, due to the high wages rate of labour, poor natural conditions such as crop failure as well as the increase in raw materials price, taxes, transportation cost … the cost of production is raised. In this case, managers of the company would either supply a smaller quantity of product to the market or stock the product till the market price is exceeded.


c. Technology


Shifts in the supply curve are usually the result of advances in technology that reduce the cost of production. Technology advances can improve the production efficiency and therefore cut down the cost spent for production. Computers, televisions and photographic equipment are good examples of the effects of technology on the supply curve. A huge computer that used to cost several thousand dollars can now be purchased for a few hundred dollars with such improvement in storage and processor. In this case, the supply for the computer in the present day would be much higher than that of the past.


d. Governments’ policies


With the role to regulate and protect the industry, the Government has a great influence on the supply of a product. The lower the tax, the higher the supply of that product. On the other hand, if the strict regulations are imposed and the excise duty is added, the product’s supply would fall off.



e. Transportation condition


The supply chain relies on the efficient management of assets and logistics to get raw materials, parts and finished products from one place to another. Transport is always a constraint to the supply of products, as the products are not available on time due to poor transport facilities.


With the lack of transportation management, raw materials could not be delivered to the manufacturer fast and in good condition. The lack of facilities would also prevent the company from distributing its product to consumers when there is a burst in demand. This would not only damage the company’s benefit but also lower the competitiveness of the company towards its competitors.


For situations like this, it is crucial for the company to manage the transportation and optimize its delivery route. By using route optimization algorithm, Abivin vRoute provides the most optimal transportation management solution to ensure a better delivery process and guarantee on-time delivery.


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References:

1.https://www.investopedia.com/terms/s/supply-curve.asp

2.http://www.economicsdiscussion.net/supply/8-factors-that-influence-the-supply-of-a-product/3369

3.https://smallbusiness.chron.com/effects-technology-supply-demand-curves-30626.html


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