Real Estate Council of Alberta Fundamentals Practice Exam

Which of the following factors is considered a determinant of supply?

1. Consumer preferences

2. Cost of production

3. Market trends

4. Consumer income

The correct answer is: Cost of production

The correct answer focuses on the cost of production as a determinant of supply because it directly influences how much of a good or service producers are willing and able to offer in the market. When production costs rise due to increased prices for raw materials, labor, or overhead, suppliers may reduce the quantity they produce since profitability would decrease. Conversely, when production costs decrease, suppliers can afford to produce more, potentially leading to an increase in supply. Understanding production costs is crucial not only for assessing supply levels but also for evaluating how shifts in these costs can impact market prices. For instance, if a new technology reduces production costs, this could lead to an increase in supply, which might subsequently lower prices for consumers. Consumer preferences, market trends, and consumer income do influence demand rather than supply. While they are essential aspects of market dynamics, they do not dictate the supply side of the equation in the same direct manner that production costs do.