Shifts in Supply

Have you ever noticed that sometimes the goods are sold at the store at very low prices? This happens when suppliers need to get rid of unnecessary stock. Why did this happen in the first place you may ask? There are numerous factors that could have caused the quantity supplied to increase due to the shifts in supply. Ready to know what those factors are that cause the shifts in supply? Read on to learn more!

Shifts in Supply Shifts in Supply

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    Shifts in Supply Meaning

    One of the key elements that make up the dynamic nature of markets is supply. Producers, whose decisions and behavior ultimately create supply, are responsive to changes in various economic factors. These factors include production or input costs, advances in technology, producers' expectations, number of producers in the market, and prices of related products and services.

    Changes in these factors may, in turn, change quantities of products/services supplied in their respective markets. When a quantity of a good or service supplied changes, this fluctuation is reflected by a sideward shift of the supply curve.

    Shift in supply is a representation of a change in the quantity of a good or service supplied at every price level due to various economic factors.

    Shift in Supply Curve

    When the supply curve shifts, the quantity supplied of a product will change at every price level. This is referred to as a sideward shift in the supply curve.

    Thus, depending on the direction in which the quantity of the product/service supplied changes, the supply curve will shift either rightward or leftward. This occurs because the quantity changes at each given price level. As the quantity supplied is drawn as a function of price, only a change in the non-price factors would result in a sideward shift.

    Rightward Shift in Supply Curve

    If the quantity of the product/service supplied at each price level increases due to economic factors other than price, the respective supply curve would shift rightward. For a visual example of a rightward shift of the supply curve, refer to Figure 1 below, where S1 is the initial position of the supply curve, S2 is the position of the supply curve after the rightward shift. Note that, D marks the demand curve, E1 is the initial point of equilibrium, and E2 is the equilibrium after the shift.

    shifts supply rightward shift studysmarterFigure 1. Rightward shift of the supply curve, StudySmarter Original

    Leftward Shift in Supply Curve

    If the quantity of a product/service supplied at each price level decreases due to economic factors other than price, the respective supply curve would shift leftward. To see what a leftward shift of the supply curve would look like on a graph, refer to Figure 2, provided below, where S1 is the initial position of the supply curve, S2 is the position of the supply curve after the shift. Note that, D represents the demand curve, E1 is the initial equilibrium, and E2 is the equilibrium after the shift.

    shifts in supply leftward shift studysmarterFigure 2. Leftward shift of the supply curve, StudySmarter Original

    Shifts in Supply: Ceteris Paribus Assumption

    The Law of Supply describes the relationship between the quantity of a good supplied and price, stating that as the price increases, the quantity supplied will increase as well. This relationship is supported by the ceteris paribus assumption, which translates from Latin as "all other things held equal", meaning that no economic factors other than the price of the good or service at hand are changing.

    This assumption helps isolate the relationship between price and quantity supported by the law of supply. Isolating the effect of price on the quantity supplied without considering the possible influence of other outside factors helps highlight the price-quantity relationship. However, in the real world, the influence of a variety of economic factors besides price is unavoidable.

    Producers make decisions based on a variety of factors besides the market price, such as changes in input prices, changes in prices of related goods, technological innovations, the number of producers in the market, and changes in expectations. When these factors come into play, quantities supplied at all price levels may respond and change as well. As such, any change in these factors would cause a supply curve to shift.

    Causes of shifts in supply curve and shift in supply curve examples

    Producers are affected by and must take into account a variety of other economic factors that may subsequently cause a change in the quantity of a good or service supplied. The factors listed below are the ones that you will need to focus on at this stage.

    Shifts in Supply: Changes in input prices

    When coming up with the quantity of any good or service to supply in the market, producers must take the prices of inputs that they will have to use in the production process into account. Subsequently, any changes in these input prices would likely cause producers to change the quantities of the good or service that they are willing to supply.

    Suppose the price of cotton increases. Higher cotton prices would make the production of cotton clothes costlier for producers, thus incentivizing them to lower quantities of the end product supplied. This would be an example of a leftward shift in the supply curve for cotton clothes caused or influenced by an increase in input prices.

    On the other hand, suppose there is a discovery of a significant amount of gold deposits, making gold more abundant and cheaper. This will enable producers of gold products to supply higher quantities of their products. Hence, the supply curve for gold products would shift rightward.

    Shifts in Supply: innovations in technology

    Developments in technology may help producers reduce their production costs and improve production efficiency. This will incentivize producers to supply higher quantities of goods, which will translate to the supply curve shifting rightward.

    Alternatively, if for any reason producers have to resort to using less advanced technology in their production process, they will likely end up producing lower quantities. In that case, the supply curve will shift leftward.

    Consider the following situation: a new software allows an accounting firm to automatize parts of their data processing that would previously require hours of hands-on work by their employees. Hence, by significantly cutting operating costs, this software allows the firm to be more efficient and thus be more productive. In this case, an advance in technology leads to an increase in the quantity of a service supplied, shifting the supply curve to the right.

    Shifts in Supply: changes in prices of related goods

    The Law of Supply states that the quantity supplied will increase as price increases, which is relevant to the behavior of the quantity of goods supplied in response to changes in prices of their related goods.

    On the production side, the related goods are defined as follows:

    • substitutes in production are alternative products producers can make using the same resources. For example, farmers can choose if they produce corn or soybean crops. A decrease in the price of the substitute in production (Product B) will incentivize producers to reduce its production while increasing the production of the original good - Product A shifting the supply curve of the original good (Product A) to the right.

    • complements in production are products made during the same process of production. For example, to produce leather, ranchers also produce beef. An increase in the price of leather (Product A) incentives ranchers to increase the number of cows in their herds which leads to a raise in the production of beef (Product B), shifting the supply curve to the right.

    There are also two types of related goods from the perspective of the consumer:

    -Substitute goods are products and services that satisfy the same desires or needs for consumers as the goods that are substituted, thus serving as a sufficient alternative.

    - Complementary goods are goods that consumers tend to purchase together with the goods that are complemented, thus adding value to each other

    Let's consider an example of a publishing company printing books in hardcovers and paperbacks which are substitutes in production. Suppose the price of hardcover textbooks significantly increases. It incentivizes publishers to produce more hardcover books rather than paperbacks. As a result, producers are now likely to reduce the quantities supplied of paperback textbooks, thus shifting the supply curve to the left.

    Shifts in Supply: changes in the number of producers

    The more producers are supplying a product or service, the higher the quantity of that product or service supplied there is in the market. If, for any reason, more producers enter the market to supply a product, the market supply curve will shift rightward with the quantity supplied increasing at each price level. On the other hand, a reduction in the number of producers will translate into lower quantities supplied, reflecting in a leftward shift of the market supply curve.

    Suppose that supplying corn syrup becomes a more profitable business after the price of corn, being a key input, falls significantly. This change attracts more producers to start supplying corn syrup due to its' increase in profitability. As a result, the quantity of corn syrup supplied increases and the market supply curve will shift rightward.

    Shifts in Supply: changes in producers' expectations

    When making decisions with respect to quantities of products or services to supply, producers are likely to take into account how they expect future events and changes to affect their production. If producers foresee unfavorable market conditions in the future such as decreases in the price of their product, they may decide to reduce the quantities they supply, thus shifting the supply curve leftward. Inversely, if producers have an optimistic outlook on the future market conditions in relation to the products they supply, they may increase quantities supplied in anticipation of higher profitability.

    As sea levels continue to rise, environmentalists predict that increasing areas of coastline territories will go underwater. This outlook will serve as a disincentive to real estate developers to build more properties close to the coastline. In this case, a grim outlook for the future compels the producers (developers) to reduce quantities of their product (properties) supplied.

    Shifts in Supply: government regulations

    Whether certain regulations enforced by the governmental authorities are meant to have direct economic effect or not, depending on what these regulations are, they may affect the cost and capacity of production for various goods and services.

    A government may introduce stricter regulations on imports of certain products and services. For producers that use these goods to produce their own goods, such regulations would likely complicate the production process and possibly increase input costs for producers of the derivative goods. Thus, producers of the latter goods would likely reduce the quantities supplied, their supply curve consequently shifting leftward.

    Shifts in Supply: taxes and subsidies

    Any taxes that affect the inputs and/or the production process of any goods or services will increase production costs. If such taxes are introduced, they will likely force producers to reduce quantities of their products that they are able to supply, thus shifting their supply curve leftward.

    Subsidies, on the other hand, are likely to reduce production costs for producers. Saving on the expenses in the production process with the help of subsidies would enable producers to supply higher quantities of their goods, which would then shift the supply curve rightward.

    Suppose the government imposes significantly higher taxes on all imported silk. Higher taxes on imported silk make production of silk products less attractive to producers as such taxes translate into higher production costs, thus incentivizing them to reduce quantities supplied. This would shift the supply curve for silk products leftward.

    Shifts in Supply - Key takeaways

    • Shifts of the supply curve occur when quantities of a product or service supplied change at every given price in response to other economic factors.
    • If the quantity of the product/service supplied at each price level increases due to economic factors other than price, the respective supply curve would shift rightward.
    • If the quantity of a product/service supplied at each price level decreases due to economic factors other than price, the respective supply curve would shift leftward.
    • When considering changes in quantities of a product or service supplied and the consequent shifts of the supply curve, the price of that product or service is not a factor that directly causes those shifts.
    • The factors that may cause the supply curve to shift are:
      • Changes in input prices
      • Innovations in technology
      • Changes in prices of related goods
      • Changes in the number of producers
      • Changes in producers' expectations
      • Government regulations, taxes, and subsidies
    Frequently Asked Questions about Shifts in Supply

    What causes a leftward shift in the supply curve?

    The supply curve shifts leftward when there is a decrease in the quantity supplied at every price.

    What factors affect shift in supply curves?

    The factors that may cause change in quantity of a product or service supplied, thus affecting shifts of their respective supply curves, are as following:

    • Number of producers in the market
    • Changes in input prices
    • Changes in prices of related goods
    • Changes in producers' expectations
    • Innovations in technology

    What is a negative shift in supply curve?

    A "negative" or, more accurately, leftward shift in the supply curve is a reflection of a negative change (decrease) in quantity of a product or service supplied in the market at every price level

    What is leftward shift in supply curve?

    A leftward shift of the supply curve is a representation of the decrease in the quantity of a product/service supplied at every given price.

    What are the 7 factors that shift supply?

    Changes in input prices • Changes in the prices of related goods or services • Changes in technology • Changes in expectations • Changes in the number of producers • Government regulations • Government taxes and subsidies

    Test your knowledge with multiple choice flashcards

    If the supply curve shifts _____, quantity supplied at every price level will increase.

    If the supply curve for a certain product/service shifts leftward, this means that the quantity supplied...

    Which of the following is NOT one of the economic factors that may cause the supply curve to shift?

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