Factors which influence supply of a product

Business studies study module

Supply is defined as the quantity that suppliers are willing and are able to take to market at a given price over a given period of time.

  • The price of the product: the higher the price, the higher the supply while the lower the price, the lower the supply.
  • The cost of production: an increase in the cost of production leads to a reduction in the supply of goods, while a decrease in the cost of production leads to an increase in the supply of goods.
  • The level technology: an improvement in the level of technology leads to a reduction in cost of production in an increase in supply.
  • The government policy; this includes the imposition of taxes, subsidies, quotas and price controls. Taxes increase the cost of production hence supply will decrease. A subsidy lowers the cost of production leading to an increase in the supply. Imposition of quotas places an upper limit on the quantity that may be supplied irrespective of the price. Where the government sets prices, firms will react accordingly. If the price set is high, the supply will be high, if the price set is low, the supply will also be low.
  • Available of inputs: shortage of raw materials leads to low production, hence low supply.
  • Future expectations of price changes: where producers expect the price of goods to increase in the future, they may decide to restrict supply, until that when the prices go up.
  • Natural factors: bad weather like droughts and floods leads to poor harvests, hence low supply of agricultural products. Favorable weather conditions leads to more harvests hence more supply.

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