a) The Price of the Commodity.
The price of the commodity affects the prospect of profitability of an enterprise. Every entrepreneur is assumed in economics to be engaged in production in order to achieve maximum profit. He must certainly achieve a normal return on capital invested, or there is no incentive at all to stay in the industry. Good prospects of profitability will encourage him to come in and produce the supplies required. He will expand the production of his enterprise until output reaches such a level that profit is at a maximum.
b) Conditions of Supply.
They are the costs of production, the state of technological development (the more advanced the technology, the greater the flood of supplies that pours on to the market), natural influences (hurricanes, tornadoes, hail, frost, and drought disrupt output) and abnormal political influences (war, strikes, civil unrest, government interference prevent the normal activities of production).
Thus, we must note that just as want is the basis of demand, the prospect of profitability is the basis of supply; and just as consumers vary in their demand for goods, suppliers vary in their ability to supply. This is shown in the Laws of Supply and Demand summarized as follows:
1. When the price of a commodity falls the quantity that is demanded will be increased.
2. When the price of a commodity rises the quantity that is supplied will be increased.
3. Prices will adjust to that level which equates demand and supply.
4. All increased supply lowers market price and causes an extension of demand.
5. A decreased supply raises market price and causes a reduction of demand.
6. A decreased demand lowers price and also brings about a reduction of supply.
7. An increased demand raises price and also brings about an extension of supply.