All businesses that supply goods and services have to make a number of difficult decisions about the kinds, amounts and prices of the goods and services they wish to supply.
In a market system, businesses only supply goods and services that can make a profit. Likewise, a business will not supply a good or service that cannot make a profit. Even if there is a demand for a good or service, it will only be supplied if a profit can be made.
Consequently, the government or other non-profit enterprises usually supply goods and services that private firms regard as unprofitable.
Economists agree that the following factors are the main determinants of the supply of a good or service:
- the price of a good or service (represented by the symbol Px)
- the prices of inputs, also known as the cost of production (represented by the symbol Pc)
- the prices of alternative goods and services (represented by the symbol Pg)
- the technology needed to make the good (represented by the symbol T)
- the number of suppliers (represented by the symbol N)
- the weather
- expected prices
Apart from the price of the good or service and the number of suppliers, all the other factors are mainly concerned with the cost of production. A firm’s supply decision therefore mainly depends on the cost of production and the profits that it can make by supplying the good or service.