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?
Choose 1 answer:
Choose 1 answer:
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.
**Shifts in supply: a car example.** As a result of the higher manufacturing costs, the supply curve shifts to the left, toward S1\text S_1. Firms will profit less per car, so they are motivated to make fewer cars at a given price, decreasing the quantity supplied.
A decrease in costs would have the opposite effect, causing the supply curve to shift to the right, toward S2\text S_2. Firms would profit more per car, so they would be motivated to make more cars at a given price, increasing the quantity supplied.
Economists usually talk about supply and demand curves shifting left and right, but you could think about them shifting up and down instead if you really wanted to.
In this car example, you could say that when the price of steel goes up, the car maker will need to charge more at a certain quantity to cover its costs. The supply curve would shift upward.
It's not wrong to think of it this way, but you'll usually hear people talking about left and right shifts.

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.
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.
**Factors that shift supply curves.** (a) A list of factors that can cause an increase in supply from S0\text S_0 to S1\text S_1. (b) The same factors, if their direction is reversed, can cause a decrease in supply from S0\text S_0 to S1\text S_1.


This article is a modified derivative of “Shifts in Demand and Supply for Goods and Services” by OpenStax Microeconomics (CC BY 4.0).
The modified article is licensed under a CC BY-NC-SA 4.0 license.