There are several different factors that can alter supply, increasing or decreasing it thereby causing the supply curve to shift to the right or to the left. Before I get into that though, there is a very important distinction that I want to make.
The Difference between a Change in Supply and a Change in Quantity Supplied
When talking about supply, there are two terms that get used quite a bit: supply and quantity supplied. These two terms have two very different meanings. When economists talk about quantity supplied, they are referring to one particular price point and one particular quantity, so a single point on the table or the graph. When economists talk about supply, they are referring to the entire table or graph.
If we take a look at any supply equation, table, or graph, we’ll notice that there are two variables: price (P) and quantity supplied (QS). These two variables are what we use to construct our supply model; we take a look at the effect of price on the quantity supplied. We call these variables endogenous variables because they are variables inside of our model. Whenever we alter an endogenous variable, we move along the curve. So a change in price will cause a change in quantity supplied, moving you along the supply curve. So for example, if we change our price from Pa to Pb, we would move along the curve from point a to point b. Correspondingly, the quantity supplied that we’re referring to goes from Qa to Qb.
When we talk about factors outside of our model (things other than price or quantity supplied), we refer to them as exogenous variables. When you change an exogenous variable, instead of moving along the curve from point to point, you move the entire curve itself. A change in an exogenous variable will shift the entire supply curve. We call these variables determinants of supply or shifters of supply because a change in one of these factors will cause producers to alter the quantity they produce and sell at every price point. When firms are producing and selling more at every single price point, we say that supply has increased and it is represented graphically by a shift to the right. When firms are producing and selling less at every price point, we say that supply has decreased and it is represented graphically by a shift to the left.
Changes to exogenous variables (variables outside of the model) will shift the whole curve. Moving from S1 to S2 is a decrease in supply. Moving from S1 to S3 is an increase in supply. These movements are referred to as a change in supply.
Determinants of Supply
With that out of the way, let’s take a look at the determinants of supply. There are six basic factors that will alter supply; let’s see how they work.
Remember that suppliers are motivated by profit. Anything that changes the cost of production will change profit, which will change supply. These first three determinants deal with changes to costs.
Resources (or inputs or factors of production) are the things that go into making the product itself. It’s the price of the resources that make up the cost of production. The higher the cost of resources, the higher the production cost, the smaller the profits and vice versa. So it makes sense that an increase in resource prices will decrease supply, shifting the curve to the left and a decrease in resource prices increases supply, shifting the curve to the right. [break]
When talking about technology, we’re referring to the means of production, i.e. how efficient we are at producing something. The more improved the technology, the more efficient the production is, the lower the production cost and therefore the greater the supply. For example, using machines to plow fields is cheaper than using animals which is cheaper than doing it by hand. As the technology that is used improves, the cost of production falls, increasing the supply and vice versa. [break]
Taxes and Subsidies
Taxes are usually treated as an additional cost of production. (Whether or not suppliers are able to push the cost of taxes onto consumers through increased prices is something we’ll go over when we talk about elasticity.) Again, anything that increases costs will decrease supply so an increase in taxes decreases supply and a decrease in taxes increases supply. Subsidies on the other hand are the opposite of taxes. Rather than taking money for producing goods and services, the government is giving you money to produce the goods and services so an increase in subsidies actually lowers costs, which increases supply and a decrease in subsidies decreases supply.[break]
There are also non cost related determinants of supply.[break]
Prices of Other Goods
Producers often have the capacity to produce more than one type of product. For example, a farmer that grows potatoes probably grows carrots as well. If that farmer notices that the price carrots sell for goes up, he might devote more of his land to growing carrots and less of his land to growing potatoes. The supply of carrots would go up and the supply of potatoes would go down. In other words, the producer will use his resources to produce more of the product(s) that he deems to be relatively more profitable.[break]
Number of Sellers
An easy one. Other things equal, the more people that are selling the same good or service, the greater the supply in the market. The fewer people selling the good or service, the lower the supply in the market.[break]
This one is a bit more complicated. What suppliers expect to happen to the price of their product in the future might cause different people to react differently. For example, if a supplier expects the price to go up for his product, he might withhold some of his goods from the market now to sell them at a higher price later, which decreases current supply. On the other hand, another supplier might respond to the anticipated price increasing by increasing production now so he’ll be able to sell more units later, thereby increasing supply now.
-A change in supply is different from a change in quantity supplied. A change in supply shifts the entire curve whereas a change in quantity supplied moves along the curve.
-An increase in resource prices decreases supply; a decrease in resource prices increases supply.
-Improvements in technology increases supply; regression in technology decreases supply.
-An increase in taxes decreases supply; a decrease in taxes increases supply.
-An increase in subsidies increases supply; a decrease in subsidies decreases supply.
-An increase in profitability of other goods will decrease the supply of a good; a decrease in profitability of other goods will increase the supply of a good.
-An increase in the number of sellers will increase supply; a decrease in the number of sellers will decrease supply.
-Changes in producer expectations don’t result in clear cut changes in supply.
McConnell, Campbell R., Stanley L. Brue, and Sean Masaki. Flynn. Macroeconomics: Principles, Problems, and Policies. Boston: McGraw-Hill Irwin, 2009. Print.
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