(a) What is supply? [5 marks] (b) Describe any five determinants of supply. [15marks]

Answer Details

(a) Supply is the quantity of a good or service that producers are willing and able to offer for sale at a given price over a given period of time. It is not the total stock in existence but the amount actually put on the market at each price; according to the law of supply, more is supplied at a higher price and less at a lower price, other things being equal.

(b) Five determinants of supply:

1. Price of the commodity: a higher price makes production more profitable, so producers supply more; a lower price reduces the quantity supplied.
2. Cost of production: a rise in the cost of inputs (wages, raw materials, fuel) reduces profit and lowers supply, while a fall in costs raises supply.
3. State of technology: improved technology raises productivity and lowers unit cost, enabling producers to supply more.
4. Prices of other (related) goods: if the price of an alternative product a firm could make rises, resources shift to it, reducing the supply of the original good.
5. Government policy: taxes on production reduce supply, while subsidies to producers increase supply.

(Other acceptable determinants: natural factors such as weather for agricultural goods, the number of producers in the market, and producers' expectations of future prices.)