Economics 12 Notes for Economics Notes

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Determinants of supply

Price: Supply is directly proportional to price. If price rises, supply increases and vice versa. It is because the firm can make more profit selling at higher price than at lower price

Prices of inputs: Supply is inversely related to the prices of inputs. Inputs are land, labor, capital and raw materials. Their prices are wage rate, rent rate, interest rate etc. if the prices of inputs rise then the cost of production also increases then the firm supplies less than before and vice versa.

Level of technology: Supply is positively related to the level of technology. If there is advancement in technology, the firm can produce and more at the same price but if there is destruction of technology due to any cause then supply decreases.

Resources available: Supply is positively related to resources available. If there is appropriate availability of resources, then the firm can produce and supply more quantity at the same price. But if there is depletion of resources supply decreases.

Expected profit margin: If there is more profit margins to the firm, the firm supplies more and vice versa but if the firm expects more profit in the near future, currently it supplies less and vice versa.

Taxes : Supply is inversely related to taxes. If there is high tax rate, there is less supply but if the government imposes less tax, supply increases (subsidies to increase supply).

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