Supply Curve Shifts

 … a core concept in Economic Analysis

Concept description

A shift the supply curve will change the quantity that sellers are willing to supply at a given price or, equivalently, the price at which they are willing to sell a particular quantity of a good. (See Alex Tabarrok, reference below and video to right.)

In the illustration on the right, the supply curve is shifted upward (lower supply) resulting in a higher price needed to sell the same quantity and a smaller quantity that will be supplied at the same price.

Supply shifters

In his lesson video, Alex Tabarrok, explores “supply shifters” – factors that would cause an increase or decrease in the quantity supplied at a given price or increase or decrease the maximum willingness to produce a given quantity. He notes that the fundamental supply shifter is changes in costs, and the following factors can have an effect on costs:

1. Technological Innovations – tend to lower costs and therefore increase supply, e.g., the introduction of genetically modified seeds will move the supply curve to the left and reduce the price at which all equivalent seeds are sold.
2. Input Prices – higher costs shift the supply curve up and reduce supply
3. Taxes and Subsidies – taxes shift the supply curve up and reduce supply
4. Expectations – the expectation of a higher price for a good in the future increases the opportunity cost of supplying now and thus decreases the current supply of the good, if they can store the good, and vice versa
5. Entry or Exit of Producers – As producers enter and exit the market, the number of sellers of a particular good changes, directly influencing supply: entry implies more sellers in the market and thus increases supply; exit implies fewer sellers in the market and thus decreases supply.
6. Changes in Opportunity Costs – higher opportunity costs reduce supply, as illustrated in the chart below showing the effect on the supply of soybeans when the price of wheat increases, giving soybean farmers an attractive alternative use of their land.

MRU practice questions

See http://www.mruniversity.com/node/179641, accessed 20 April 2016:

1. When is a pharmaceutical business more likely to hire highly educated, cutting-edge workers and use new, experimental research methods?
   1. When the business expects the price of its new drug to be low
   2. When the business expects the price of its new drug to be high
   3. The pharmaceutical business is unlikely to hire highly educated workers under any price.
2. Imagine that a technological innovation reduces the costs of producing high-quality steel. What happens to the supply of steel? 
   1. The supply of steel increases
   2. The supply of steel decreases
   3. Reduced production costs for steel have no effect on the supply of steel
3. When oil companies expect the price of oil to be higher next year, what happens to the supply of oil today? 
   1. The supply of oil increases
   2. The supply of oil decreases
   3. Expectations about the price of oil have no effect on the supply of oil today
4. Do taxes usually increase the supply of a good or reduce the supply?
   1. Taxes increase the supply of the good
   2. Taxes reduce the supply of the good
   3. Trick question! Taxes have no effect on the supply of a good

Source

Alex Tabarrok, The Supply Curve Shifts, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/supply-curve-shift, accessed 20 April 2016.

Atlas topic and subject

Supply, Demand, and Equilibrium (core topic) in Economic Analysis.

Page created by: Ian Clark, last modified on 20 April 2016.

Image: Minute 5:51 of MRU Video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/supply-curve-producer-surplus-definition, accessed 20 April 2016.