Other Factors Affecting Supply
- Other factors, aside from price, that affects a producer’s willingness to supply are:
- Costs of production
- Size and nature of the industry
- Government policy and other factors
Costs of Production
- There are many things that can affect the costs of production
- Any change in any input can have an effect on the firm’s profits and willingness to supply the market.
- The most obvious is a change in the costs of the factors of production
- For example, oil prices have been rising over the years, and this clearly impacts upon a firm’s production costs
- How much is imports will depend upon how important these factors are for a firm’s production costs
- In some types of activity, labour costs are a high proportion of total costs
- This is true in service sector activities, such as retailing and transport
- Therefore, an increase in labour costs has to be passed onto the consumers in the form of higher prices
- In practise, it is difficult to generalise
- Labour in plentiful supply will usually not increase in price to the same extent as labour which is specialist and in short supply
- The extent of any change in the supply price will depend upon if a producer can be more efficient in their production process
- An example would be replacing workers in car manufacturing with machines (capital)
- Technological advances decrease production costs
Size and Nature of the Industry
- Some industries are more competitive than others
- Where this is the case (such as grocery retailing), minor increases in costs can have a big impact on supply
- Any cost increases in less price competitive markets can usually be passed on to consumers, with very little effect on profits
Government Policy
- Most product that firms supply are subject to indirect taxation such as VAT
- Any increase in this taxation will have to be passed on to the consumer through increase prices
- In turn, the increased prices will affect the producer’s willingness to supply
- Legislation and regulations can also affect a firm’s costs
- Health and Safety regulations invariable lead to higher production costs
- Such regulations tend to affect all firms, so any effect on the costs of production tends to affect all firms in a fair way
- In a few instances, the government is prepared to give an annual subsidy to firms
- This is in the form of a payment to reduce costs, and hence prices
- Examples are to farmers to keep food costs low, and to rail transport companies
- As a result, the supply of products is increased
Other Factors
- The supply of products is often subject to factors that suppliers have little or no influence
- An example is agriculture, where bad weather can destroy a whole season’s harvest
- Another example is that when foot and mouth disease spread, it reduced the supply of pork and beef coming onto the market
- To contrast, nutritionists claimed that pomegranate juice was very beneficial to one’s health, and as a result, the demand for pomegranate juice has increased