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Does only price affect supply?
- No. Many other factors change supply, even when the price stays the same:
- Number of sellers in the market
- Technology
- Future expectations
- Price of related goods
- All these are called determinants of supply .
Determinants of supply (besides price)
Determinants of Supply
Factors other than the product's own price
Number of sellers
Technology
Future expectations
Price of related goods
1. How does the number of sellers affect supply?
-
Example
- A street has only one tea stall.
- Tea is scarce, so the seller raises the price.
- Later, ten tea stalls open on the same street.
- There is plenty of tea, so stalls lower prices to attract buyers.
| Number of sellers | Supply compared with demand | Price |
|---|---|---|
| More | Supply is more than demand | Falls |
| Fewer | Supply is less than demand | Rises |
2. How does technology affect supply?
- Example 1 - Cold storage in transport keeps mangoes fresh on the way to distant markets. So more mangoes reach the market, and market supply rises.
- Example 2 - A farmer starts using drip irrigation (water drop by drop, straight to the roots) and weather sensors (which give information about the weather). Crop production rises, so supply rises.
- Better technology reduces the cost of production . Lower cost can allow producers to produce more and supply more. The opposite happens if technology gets worse.
3. How do future expectations affect supply?
- Example 1 - Sweet makers expect demand to boom before Diwali. So they make more sweets in advance.
-
Example 2
- Potato wholesalers (who sell goods in large quantities) expect prices to rise in the peak season.
- So they hold back potatoes now, to sell later at higher prices.
- Today's supply falls.
| Producers expect | So they | Supply |
|---|---|---|
| Demand to boom | Produce more | Rises |
| Demand to fall | Produce less | Falls |
| Prices to rise later | Hold back stock now | Falls today |
4. How does the price of related goods affect supply?
- The supply of one good depends on how profitable the other choices are for the seller.
Substitutes in production
Complements in production
Goods made from the same land or resource, one instead of the other
Goods made together; making one also makes the other
Example: Wheat and chickpeas on the same field
Example: Sugar and molasses from sugarcane
-
Substitutes in production
- A farmer can grow wheat or chickpeas.
- Wheat prices are low, so profit from wheat is low.
- Chickpea prices are high, so profit from chickpeas is high.
- So next season, he grows more chickpeas and less wheat.
- If the price of one good rises, the supply of the other falls .
-
Complements in production
- The price of sugar rises.
- Sugar mills crush more sugarcane to make more sugar.
- Crushing sugarcane also produces molasses, so the supply of molasses rises too.
- If the price of one good rises, the supply of the other rises .
Prices affecting supply decisions
Wheat
Low price, lower profit
Chickpeas
High price, higher profit
↓
Farmer grows more chickpeas and less wheat next season
🔎 LET'S EXPLORE
What happens to the supply of a product in case of a change in the cost of inputs, discovery of an alternate input, depletion of resources, change in weather, disaster, etc.? Discuss in class using examples of diverse goods and services.
- Inputs are the things used to make a product, like seeds, fuel, raw material and labour.
| Change | Supply | Example |
|---|---|---|
| Cost of inputs rises | Falls | Costlier fertiliser, so farmers grow less |
| Cheaper alternate input found | Rises | A cheaper raw material lowers cost, so more is made |
| Resources get used up | Falls | Less fish is caught as fish stocks run down |
| Good weather | Rises | A good monsoon gives a big rice crop |
| Bad weather | Falls | A heatwave damages the vegetable crop |
| Disaster | Falls | A flood cuts off roads, so fewer goods reach shops |
📖 Questions from the Book
3. A farmer traditionally irrigates fields manually (labour-intensive). He installs drip irrigation (a technology upgrade) that reduces water use by 40 per cent and increases yield by 30 per cent. How does this affect a. His cost of production, b. His willingness to supply at different prices, c. The overall market supply if many farmers adopt this technology?
- a. Cost of production - he uses 40% less water and less manual labour, and gets 30% more crop, so his cost for each kg of crop falls.
- b. Willingness to supply - each kg now costs less to grow, so selling it gives more profit. He is willing to supply more at every price.
- c. Overall market supply - if many farmers adopt drip irrigation, market supply rises, and with more supply, prices may fall.
Summary: What are determinants of supply?
- The factors that decide how much of a product sellers are willing and able to offer.
| Determinant | How it affects supply | Example |
|---|---|---|
| Price of the product itself | Price up, supply up; price down, supply down (Law of Supply) | Seller A offers 3 kg at Rs 150 |
| Number of sellers | More sellers, more supply | Ten tea stalls on one street |
| Technology | Better technology, lower cost, more supply | Cold storage brings more mangoes to market |
| Future expectations | Expect a demand boom, produce more; expect higher prices, hold back now | More sweets made before Diwali |
| Price of related goods | Substitute in production's price up, supply of the other down; complement in production's price up, supply of the other up | More chickpeas, less wheat |
1. Name the determinants of supply.
Show answer
Price of the product, number of sellers, technology, future expectations, and price of related goods.
2. What is the difference between substitutes in production and complements in production?
Show answer
Substitutes in production are made one instead of the other (wheat or chickpeas). Complements in production are made together (sugar and molasses).
3. Fill in the blank: If there are fewer sellers, supply is lower than demand and prices ______.
Show answer
Rise.
4. Why might potato wholesalers hold back supply now?
Show answer
They expect prices to rise in the peak season, so they sell later at higher prices.
5. True or false: A disaster like a flood increases supply. Give a reason.
Show answer
False. It damages goods and cuts off transport, so supply falls.
📝 What Have We Learned
- Supply changes not only with price, but also with the number of sellers, technology, future expectations and related goods.
- Better technology lowers cost and raises supply, while more sellers raise supply and push prices down.
- If a substitute in production's price rises, supply of the other falls; if a complement in production's price rises, supply of the other rises.
