In addition to price, there are numerous other factors that can change the relative profitability of certain products and therefore affect supply. A change in any one of these factors can cause the costs of production to either increase or decrease and change their willingness to supply the product at any given price.
When costs for a producer increase, the profit to be made on that product decreases (ceteris paribus) and they will be less willing to supply as much of that product to the market. Instead, they might prefer to supply more of another product whose production costs are now ‘relatively’ lower. This decision is related to the concept of opportunity cost, because if the cost of producing a specific product increases, the opportunity costs of continuing to supply the same amount of that product to the market also increase. The producer will therefore look for ways to minimise the opportunity costs by either:
To illustrate how this works, I will use the example of a large landholder that uses 50% of his land for wine production and the other 50% for apple growing. If the costs of producing wine increase (for example, due to the introduction of a new tax on wine), but the costs of apple growing remained the same, the producer is, ceteris paribus, likely to devote less of his land to wine production and more to apple growing. This is because the relative profitability of apple growing is going to be higher when compared to wine production, leading the producer to supply less wine to the market. Alternatively, the producer might initially respond to the new tax by raising the price of wine to cover the higher costs. Given that the higher price is likely to reduce demand for wine, the end result is very similar - with the wine producer supplying less wine to the market and devoting less land to wine production. Of course, the reverse will apply if the wine producer experiences a fall in the costs of wine production or if there is a rise in the costs of apple production.
The following factors will also work to change the willingness of producers to supply products to the market. Note that they are all factors that affect either the cost of production or the availability or quality of inputs.
A change in labour costs
If the costs of labour (such as wages) were to increase, it means that it costs more to employ a given workforce, leading to higher production costs. Again, the producer would be willing to supply fewer products to the market at any existing price.
A change in costs of capital
Just like the costs of labour, most businesses will employ capital, such as machinery, vehicles, robotics, computers and equipment. A rise in the cost of capital will also lead to a reduction of supply to the market.
A change in the costs of materials
Materials are effectively parts of the ‘unfinished product’ such as steel and plastics used in the production of a motor vehicle, or seeds and fertilizers for apple production. When the costs of materials increase it will also lead to a reduction of supply to the market.
Changes in productivity
Productivity refers to the efficiency of the business in terms of its ability to convert inputs, such as materials, into actual products. As was discussed in Chapter 1, productivity is the output per given level of inputs. Productivity is most often measured by the total level of production for an enterprise divided by the number of hours worked (labour productivity). If it increases, it effectively reduces the average costs of production and means that producers will be more willing to supply to the market.
Changes to Taxes
Suppliers are forced to pay direct income taxes (such as the company tax) as well as a host of other taxes. Examples of taxes affecting businesses include fuel, tobacco and alcohol excises, State Government payroll taxes and land taxes, as well as the carbon tax that was introduced in 2012. If these taxes are lowered on all or any products, we should see an increase in the willingness to supply.
Changes to the costs of complying with government laws and regulations
Laws and regulations impacting on the behaviour of producers are invariably implemented to achieve a better outcome for society. Examples include laws relating to Occupational Health and Safety, Workcover, Equal Opportunity, Anti-Discrimination, insider trading, product safety and standards. Chapter 4 will highlight how these laws help to achieve a more efficient allocation of resources (or better overall living standards for Australians), but they do come at a cost for business. As the laws become more complex and difficult to comply with, the costs for business rise and the willingness to supply will fall.
Subsidies are cash or other benefits given by governments to businesses in order to help them produce a particular product. For example, the motor vehicle industry has received subsidies to ensure that Australia continued to produce motor cars. However, the planned reduction in these subsidies from 2013-14 was a factor contributing to the decision by Holden and Ford to eventually stop manufacturing cars in Australia.
Price of other products
In addition, the willingness to supply a particular product to the market will also depend upon the price received by producers of other products in another market. For example, a wheat farmer would be much less willing to supply wheat if it became evident that the demand for and price of corn has increased dramatically. If this change in the demand and price of corn was expected to be ongoing, then the wheat farmer is much more likely to use more of her acreage to farm corn instead of wheat. In this case, neither the costs or price of wheat has changed, but the wheat farmer is more likely to decrease the supply of wheat because the ‘relative’ price of wheat has fallen, when compared to corn prices. Again, the opportunity costs of producing the same volumes of wheat have increased.
The supply of a product in the market place can also be affected by the ability (rather than willingness) to supply the product. Changes in the ability to supply products is most common in commodity markets, particularly agriculture, where total amounts produced will largely depend on climatic factors. For example, natural disasters or unseasonal events (such as a drought or a flood) will negatively impact on supply levels in markets.