Shifts in Supply

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.

Figure 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.

Figure 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.

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.

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.

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.

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.

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.

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.