If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Lesson 2: Supply

# What factors change supply?

Price isn't the only thing that affects the quantity supplied.

## Key points

• 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?

## 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.

### Natural conditions

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.

### New technology

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

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.

## Want to join the conversation?

• 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?
• 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.
• Hi!
On his video, he pointed out 5 factors that impacts supply:
1) Price of related product
2) Number of suppliers
3) Price Expectation
4) Technology
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
3) Technology
4) Gov. Regulation

• 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.
• 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?
• Taxes are added on, and so what would happen is the supply curve would shift upward by the amount of the tax.
• 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?
• As Supply Increases, Prices does Decreases. What you are assuming is correct. Just try to interpret the graph once again.
• What would be an example for supply to shift left because of education?
(1 vote)
• Not sure if this is accurate, but it could be possible that if the government reduced spending on education and the result was a less productive workforce that would increase the cost of producing and supply would shift to the left.
• What direction will the supply curve shift, based on an EXPECTED increase in the cost of production?
(1 vote)
• An expected increase in the cost of production will result the producers supplying lesser and therefore the supply curve will shift leftwards.
• 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 ?