Price isn't the only thing that affects the quantity supplied.
- Supply curve shift: Changes in production cost and related factors can cause an entire supply curve to shift right or left. This causes a higher or lower quantity to be supplied at a given price.
- The ceteris paribus assumption: Supply curves relate prices and quantities supplied assuming no other factors change. This is called the ceteris paribus assumption. This article talks about what happens when other factors aren't held constant.
The ceteris paribus assumption
A demand curve or a supply curve is a relationship between two, and only two, variables: quantity on the horizontal axis and price on the vertical axis. The assumption behind a demand curve or a supply curve is that no relevant economic factors, other than the product’s price, are changing. Economists call this assumption ceteris paribus, a Latin phrase meaning “other things being equal”. If all else is not held equal, then the laws of supply and demand will not necessarily hold. The rest of article talks about what happens when other factors aren't held constant.
How production costs affect supply
A supply curve shows how quantity supplied will change as the price rises and falls, assuming ceteris paribus—no other economically relevant factors are changing. If other factors relevant to supply do change, then the entire supply curve will shift. A shift in supply means a change in the quantity supplied at every price.
Say we have an initial supply curve for a certain kind of car. Now imagine that the price of steel—an important ingredient in manufacturing cars—rises so that producing a car becomes more expensive.
Which direction would this rise in cost cause the supply curve to shift?
Shifts in supply: a car example
The graph shows supply curve S sub 0 as the original supply curve. Supply curve S sub 1 represents a shift based on decreased supply. Supply curve S sub 2 represents a shift based on increased supply.
Other factors that affect supply
In the example above, we saw that changes in the prices of inputs in the production process will affect the cost of production and thus the supply. Several other factors affect the cost of production, too.
In 2014, the Manchurian Plain in Northeastern China—which produces most of the country's wheat, corn, and soybeans—experienced its most severe drought in 50 years. A drought decreases the supply of agricultural products, which means that at any given price, a lower quantity will be supplied. Conversely, especially good weather would shift the supply curve to the right.
When a firm discovers a new technology that allows it to produce at a lower cost, the supply curve will shift to the right as well. For instance, in the 1960s, a major scientific effort nicknamed the Green Revolution focused on breeding improved seeds for basic crops like wheat and rice. By the early 1990s, more than two-thirds of the wheat and rice in low-income countries around the world was grown with these Green Revolution seeds—and the harvest was twice as high per acre. A technological improvement that reduces costs of production will shift supply to the right, causing a greater quantity to be produced at any given price.
Government policies can affect the cost of production and the supply curve through taxes, regulations, and subsidies. For example, the U.S. government imposes a tax on alcoholic beverages that collects about $8 billion per year from producers. Taxes are treated as costs by businesses. Higher costs decrease supply for the reasons discussed above. Another example of policy that can affect cost is the wide array of government regulations that require firms to spend money to provide a cleaner environment or a safer workplace; complying with regulations increases costs.
A government subsidy, on the other hand, is the opposite of a tax. A subsidy occurs when the government pays a firm directly or reduces the firm’s taxes if the firm carries out certain actions. From the firm’s perspective, taxes or regulations are an additional cost of production that shifts supply to the left, leading the firm to produce a lower quantity at every given price. Government subsidies, however, reduce the cost of production and increase supply at every given price, shifting supply to the right.
Summing up factors that change supply
The graph below summarizes factors that change the supply of goods and services. Notice that a change in the price of the product itself is not among the factors that shift the supply curve. Although a change in price of a good or service typically causes a change in quantity supplied or a movement along the supply curve for that specific good or service, it does not cause the supply curve itself to shift.
Factors that shift supply curves
Two graphs—the graph on the left lists events that could lead to increased supply; the graph on the right lists events that could lead to decreased supply.
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- The bottom table lists "a decline in technology" as a factor that decreases supply, going on to say this is not common. When would this ever be the case?(47 votes)
- Another take on "decline in technology" may be the discovery of environmental hazards or health risks. If a certain manufacturing technique is found to be hazardous to humans or the environment after it has been implemented it may be banned. If no alternative technique can match it's efficiency there may be a decline in supply. Examples: CFC's in refrigeration or asbestos.(24 votes)
On his video, he pointed out 5 factors that impacts supply:
1) Price of related product
2) Number of suppliers
3) Price Expectation
5) Price of inputs
In this guide there are only 4 points listed where two of them are different to those he listed in the video:
1) Natural conditions
2) Input of price
4) Gov. Regulation
So which factors should i follow or refer to? The video or this article?(6 votes)
- Both. The article is being a lot more general, while the video is giving specifics. But, in most problems, you will use one of the five factors that Sal gives in the video.(8 votes)
- Under "Govt Policies", it mentions that "Taxes are treated as costs by businesses" and the example of taxes on alcohol is on the sales side, I understand but don't all businesses add taxes over and above the price of any product/ service (which itself would have been arrived at considering input cost, profit margin desired and substitute price?) i.e price + taxes? It's something that businesses pass on to the consumer as is. Thus, under what conditions is this statement true about businesses considering taxes as cost?(8 votes)
- Taxes are added on, and so what would happen is the supply curve would shift upward by the amount of the tax.(2 votes)
- This is going to sound stupid but ...
when the shifts to left and right happen, how come it doesn't affect the price?
The moment the Quantity goes down as a result of lets say Cost related reasons, I would assume that the price would change as a result but it doesn't. how come?(2 votes)
- As Supply Increases, Prices does Decreases. What you are assuming is correct. Just try to interpret the graph once again.(4 votes)
- Wait so let me get this straight, the higher the price it will go right, and the less the price is it will go left ?(2 votes)
- if you were to look at it from a production stand point, would the increase in price of steel shift the supply curve to the left (more expensive the less you can make) ?(1 vote)
- does devaluation of currency affect supply?(1 vote)
- If we are talking about floating exchange rates (that is, the currency's value isn't pegged) its more the other way around: an increase in supply devalues a currency. Currencies depreciate when the supply of that currency increases or if the demand of that currency decreases.(2 votes)
- When the price of a product is reduced, the quantity demanded goes up. If there's more quantity demanded, why is there not an increase in supply for the demanding population?(1 vote)
- It was the increase in supply that caused the price to decrease in the first place, not the other way around.(2 votes)
- Why does a change in price not shift the demand curve to the right or left?(1 vote)
- A change in price moves along the demand curve. A change in anything other than price shifts the demand curve because you are saying that, regardless of what the current price is, people want to buy more (or less)(2 votes)
- When would technology decrease?(1 vote)
- Never, really. We always know more tomorrow than we did yesterday. But you can imagine short term scenarios like, for example, a natural disaster, that has an effect similar to making technology decrease. In Puerto Rico, the electric grid was wiped out by hurricane, and for many months people have had to make do without the "technology" of electricity. But this isn't really a decrease in technology - we know how to fix the grid. It's a decrease in physical capital. Technology pretty much always moves forward, for economists.(2 votes)