Students / Subjects

Handbook >> Supply >>

Factors Affecting Supply

The Price of Inputs

In addition to the price of the product being the main factor as stated  in the Law of Supply, the price of production inputs also plays a part. The lowest price at which a firm can sell a good without losing money is the amount of money that it costs to produce it. Producing a good or service involves taking inputs and applying a process to them to produce an output. The output is the finished good or service, and inputs are raw materials, labor, utilities, liscensing fees, or even other goods. These inputs are also known as factors of production. If the price of inputs goes up, the cost of producing the good increases. And therefore at each price producers need to sell their good for more money. So an increase in the price of inputs leads to a decrease in supply. Simarly, a decrease in the price of inputs leads to an increase in supply.

The Current State of Production Technology

Production of a good involves taking inputs, applying a process to them, and producing an output. Well, production technology is involved in the process part. Increases in the level of production technology can make that process more efficient. For example, imagine that you run a basic T-Shirt screen printing business out of your home. Now lets say you decide to invest in a workshop installed with the latest production technology. With this use of technology, the operation becomes more efficient and you are able increase the supply of T-shirts. If you decide to expand even further, some added technological improvements might be warranted. This further increases your ability to supply t-shirts since it reduces your labor costs. By automating the process, reliance upon labor is lessened and those resources are released for utilization elsewhere.

The Producer's Expectations

It doesn't just matter what is currently going on - one's expectations can also affect how much of a product one is willing and able to sell. For example, if your firm produces mp3 players and you hear that Apple will soon introduce a new iPod that has more memory and longer battery life, you (and other producers) may decide to hurry up and sell your players to stores before the new iPod comes out. When people decide to increase production/sales today, they are increasing the current supply for mp3 players because of what they EXPECT to happen in the future.

The Number of Producers in the Market

As more or fewer producers enter the market this has a direct effect on the amount of a product that producers (in general) are willing and able to sell. More competition usually means a reduction in supply, while less competition gives the producer a opportunity to have a bigger market share with a larger supply.

    Back to Supply
Copyright 2006 Experimental Economics Center. All rights reserved. Send us feedback