Price is an important determinant of quantity to be supplied. But, apart from price, there are some other factors that determine the quantity of a particular product to be supplied by producer(s).
Let us now examine the role of these non-price variables in influencing the supply of a product.
1. Price of related goods (Pg):
Assume that a farmer produces two substitute products – paddy and wheat – in his own farm. Now, if the price of rice increases as compared to wheat, the farmer will utilize more of his land to produce paddy only in order to earn more profit. So, the effect of higher price of paddy would reduce the production and supply of wheat causing a leftward shift of the supply curve of wheat (figure 5.5).
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But in case of by-products we observe the opposite relationship between quantity of supply and price of a related product. For example, consider rice and its by-product, rice bran. When price of rice increases, according to the law of supply, supply of rice also increases and since rice bran is a byproduct of rice, supply of rice bran also increases. So, an increase in price of rice causes a rightward shift of the supply curve of rice bran (figure 5.4).
2. Changes in Input Prices (P1):
Higher input prices increase the cost of production, and reduce per unit potential profit at prevailing prices. As a result, the supply curve shifts to the left meaning that lesser quantity supplied at each price level (figure 5.6).
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Similarly, decrease in price of raw materials lowers the cost of production and increases profit. Increase in profit leads to increase in quantity that will be supplied at a given price. This causes the supply curve to shift to the right (figure 5.7).
3. Technology (T):
Technology specifies the relationship between quantity of input(s) and quantity of output. So an improved technology enables a firm to make more efficient use of inputs which reduces average cost a production and thereby, increases per unit profit.
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As a result, the profit maximizing firms will try to supply more quantity of products at a given price. Obviously, the supply curve will move in the rightward direction (i.e., from SS to S1S1 as shown in figure 5.8)
4. Discovery of new sources of raw materials (RD):
If new sources of raw materials are discovered, total supply of raw materials increases, causing a rightward shift of the supply curve (figure 5.9).
5. Number of Suppliers (SN):
When we look at the market supply rather than the supply of an individual firm, it becomes easier for us to recognise that number of suppliers play an important role in determining the total supply of a product in the market.
Other things remaining the same, total supply at a given market price increases as the number of suppliers increases which causes a rightward shift in the SS curve (figure 5.10). Similarly, exodus of firms leads to an opposite impact, i.e., decrease in the number of firms reduces total quantity of supply in the market at a given price, which is indicated by a leftward shift in the supply (figure 5.11).
6. Expectations (E):
Another important determinant of supply is the expectations of suppliers. If the producers expect a rise in price of their products in near future, and if the product can be stored, they will offer a smaller quantity for sale so long as the price of the product does not increase, as expected. They will prefer to sell their product when they receive higher prices, other things remaining the same.
Automatically, present supply of the good decreases and it causes a leftward shift in the supply curve (figure 5.12). On the other hand, when the suppliers apprehend a fall in price of a product, they will prefer to sell more now. This reaction of the sellers causes a rightward shift in the supply curve (figure 5.13).
7. Weather (W):
In case of agricultural products, temperature, rainfall, humidity etc. play major role in determining the quantity that can be supplied. As a consequence of favourable climatic conditions, agricultural output per unit of land increases and more quantity is expected to be supplied at a given price. Thus, favourable climatic conditions cause a rightward shift in the supply curve (figure 5.14).
On the contrary, at time of natural calamities like drought, flood etc., agricultural output drastically falls and hence, lesser quantities of agricultural products are supplied at a given price. Naturally, the supply curve moves to the left (figure 5.15).
Some of the changes in selected independent variable and their effects on the supply curve are summarized in the following table:
