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Economics

What are the factors affecting supply in economics?

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06/11/2014

The supply of a commodity is the amount of commodity a producer is willing to put in the market at a given time at a given price. The factors affecting supply are-

1. Price of the commodity- More the price of the commodity, more the supply and less the price of the commodity, less the supply.

2. Price of factors of production (e.g. land, labour) - More prices of factors of production results in less profit for the producer, therefore reduced supply.

3.Price of related goods - If a producer sees more profit in another good, and if the producer is easily able to switch, it will start making the other good, thereby reducing the supply for the good in question.

Eg: If a farmer is currently growing wheat and he calculates more profit in growing barley, next year he will plant barley, thereby reducing supply of wheat.

4. Technology- Better technology allows for more efficient use of factors of productions

5. Environmental: Weather/Natural Disasters

6. Subsidies: If government decides to subsidize a good, there will be more profit for producer. (Opposite of Tax)

7. Indirect Taxes: If the government increases the taxes that it takes from producers, there will be reduced profit therefore less supply.