Question

How do changes in the prices of factors of production affect the supply of a commodity?

Answer 1

The cost of inputs, or the things utilised to produce a commodity, including labour, raw materials, machinery, etc., also affects the supply of that item. Production costs are determined by input prices. Higher production costs will result from producers having to pay more to obtain the elements of production required to manufacture the item. Considering the commodity’s price, a higher production cost lowers the profit margin. As a result, businesses will manufacture less and sell it at a cheaper price point. The opposite effect on supply will result from a decline in input prices and, consequently, in manufacturing costs. A change in input prices will have the opposite effect on generation supply.