Determinants of Supply and the Supply Function

The quantity of a commodity a seller is willing to supply depends on more than its own price alone — several factors act together, captured in the supply function:

where $P_x$ is the price of the commodity itself, $C$ the cost of production (prices of inputs/factors of production — labour, raw material, capital), $T_e$ the state of technology, $P_r$ the price of related goods (goods that can be produced using the same resources, or joint products), $G$ government policy (taxes, subsidies, licensing conditions), $E$ sellers' expectations about future prices, and $N$ the number of sellers/firms producing the commodity. As with demand, when the supply schedule or supply curve is drawn to study the pure effect of a commodity's own price, every other determinant on this list is held constant — ceteris paribus.

Key determinants explained:

• Cost of production. A fall in the cost of raw materials, wages, or other inputs makes it more profitable to produce and sell more at the same price — supply rises. A rise in cost has the opposite effect.
• State of technology. An improvement in technology lowers the cost per unit and/or raises output capacity, raising supply at every price.
• Price of related goods. If a farmer's land can grow either wheat or cotton, a rise in the price of cotton makes growing wheat relatively less attractive, reducing wheat's supply even though wheat's own price has not changed.
• Government policy. A tax on a commodity raises the effective cost of supplying it (reduces supply); a subsidy lowers it (raises supply). …