Factors Affecting the Firm’s Supply in Response to Demand

Supply is the number of goods or services that a producer wants to sell at a certain price at a certain time. It is the number of goods and services that the producer supplies and issues to the market to be sold to the customers. The amount of these goods and services that are accepted in the market and are bought by the customers at that particular price in a given period of time is known as the demand. When these two functions are the same, the market is in equilibrium; when the supply is higher than the demand, there is a surplus; and when the demand is higher than the supply, there is a shortage.

Supply is the quantity of those goods that sellers and producers are eager and capable of selling at a certain price over a particular period of time. Again, apart from many other factors, price affects supply the most; leading to the law of supply. The higher the price, the more the producers are willing to sell their product; this is because the higher the price, the more their cost of production is being covered by the revenue generated. Likewise, the lower the price, the lower the quantity supplied (Sloman, Sutcliffe; 2003).

When there is a change in supply because of price, this causes a movement “on” the supply curve as this is the quantity demanded being affected and not supply as a whole. However, when there is a change in factors apart from price as mentioned in the coming paragraphs, there is a shift in overall demand of the products and that means that the supply curve “itself” shifts either on the left (supply increases) or the right (supply decreases).

As mentioned above in the law of supply, one of the most basic factors that affect supply is the price of the good being produced and sold. If the price is higher, then the producers supply more into the market and stock up more goods. They believe that since the sale of a higher-priced good will result in more profit, they might as well supply more if the prices are high. Also, if the supply is greater, the good is more prominent in the market and is stocked up and visible to customers eyes more than other goods; this increases the chances of the good actually being sold.

Supply also has such factors that determine the amount that is supplied into the market for sale. The most important one is the cost of production – this is the total expense that the producer has to pay to be able to use the factors of production for the manufacturing of the goods. The higher the cost of production, the higher the price has to be kept so that the producer can gain more profits and cover the expenses borne by them for production. This means that eventually, the amount supplied will also be high; as price and supply are positively related. This is the reason why the supply curve is positively sloping.

Supply also depends on the capacity of the manufacturing firm – if the company is working to its full potential; it is supplying the maximum; but if there is still potential capacity left, it can supply by producing more by working to the maximum. This means that if there is a need to increase the supply, the first try of a firm is to increase the working capacity; that is, if the working hours can be extended, then they should be, if not all workers are working 9-5, they should; if not all machines are being utilized, then they should so that the maximum input brings out the maximum output. Maximum output results in an increased supply in the market.

Also, the consequences really matter; if there is speculation that there will be war in the future, the manufacturers will have to supply more as people would want to stock up and the demand rises at that moment; therefore, in order to fulfill the demand, the supply also needs to rise (Sowell, 2004). During the time of war, nobody goes out to shop and survive on whatever that had been stocked up – therefore, during the war the demand falls and the supply is unneeded. Again, after the war ends and people have consumed whatever they have piled up, the demand rises. Thus, we can see that consequences really make a difference. Also, for example, when events like Christmas are close, we all know that the number of presents bought will increase, thus the supply of presents in shops also needs to be increased.

This can also be linked to seasons – seasons also work like speculation. In winters, demand for sweaters, jackets, mufflers, etc. increases; thus, garment makers should make sure that they are producing more winter clothing so that the increasing demand can be met by increasing supply. In such cases, where winter clothing becomes a necessity, the prices are also increased as demand increases; higher prices become an incentive for higher supply because the higher the supply during days of higher price, the higher the revenue for the firm is.

The technology of the firm also plays an important part – if the firm is well equipped with machinery that is efficient and works faster than laborers and produces much more than men can, then the supply of the firm can be higher as the output and productivity are higher. Therefore, in a developed nation where the production machinery is a normal condition, the supply is higher due to higher production; and the opposite is the case in underdeveloped countries where most production is handmade, thus, it takes time and supply is lower. Thus, the state of technology also matters a lot (Shell, 1989).

The number of firms operating in the market also makes a huge impact on overall supply. For example, if there are 100 players in the market, the supply would be less because the demand would be divided between those 100 suppliers. If the supply is high, then the result is surplus and wastage of output. If there are 2 players in the market, then obviously the firm has a higher market share and thus, needs to produce a greater amount so that the market has a high supply of those products and the high demand is well-met. At the same time, suppliers also work this way: when there are too many players in the market, they increase their supply, so that when there are too many of the firm’s products on the market shelves, they become evident and come in the sight of customers and they notice the existence of this product as compared to any other product available. Thus, the supply can rise when the firm wants to market its product and wants to make it come to the attention of customers.

Ideally, it is good if the market is in equilibrium and both supply and demand are equal. If not, the market forces usually bring them to that level by shifts in the prices.


  1. Shell, K., (1989); Economic Analysis of Production Price Indexes; Published by Cambridge University Press, ISBN 0521556236
  2. Sloman, J., Sutcliffe, M., (2003), Economics, Published by Prentice Hall/Financial Times, ISBN 0273655744
  3. Sowell, T., (2004); Basic Economics: A Citizen’s Guide to the Economy; Published by Basic Books, ISBN 0465081452
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