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Shifts in Supply

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Economics

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 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 in Supply, Rightward shift of the supply curve, StudySmarterFigure 1. Rightward shift of the supply curve - StudySmarter

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 of the supply curve, StudySmarterFigure 2. Leftward shift of the supply curve - StudySmarter

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.

There are two types of related goods: substitute goods and complementary goods. 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.

If the price of a good's substitute decreases, supplying the good that is substituted will be relatively more profitable for producers, hence incentivizing them to supply higher quantities. This will translate into a rightward shift of the supply curve. Inversely, if the price of the substitute good increases, supplying the good that is substituted becomes relatively less profitable and may compel producers to reduce the quantities supplied. This will reflect a leftward shift of the supply curve.

As for complementary goods, increases in prices of complements will add value to the goods that are complemented, thus serving as an incentive for producers of the complemented goods to increase the quantity supplied and shifting the supply curve rightward. Decreases in prices of complements will detract from the value and profitability of supplying the complemented goods, thus likely influencing producers to supply lower quantities and shifting the supply curve leftward.

Suppose the price of hardcover textbooks significantly increases. The closest substitute to hardcover textbooks is paperback textbooks, which are now the relatively less profitable product to supply. As a result of the change in the price of a substitute, producers are now likely to reduce quantities supplied of paperback textbooks, thus shifting the supply curve to the left.

Alternatively, suppose that highlighter markers are a complement to hardcover textbooks, and the price for highlighters increases. This will motivate producers to supply higher quantities of hardcover textbooks, which are the complemented goods, thus shifting the supply curve rightward.

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

Shifts in Supply

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

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

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

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.

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

Final Shifts in Supply Quiz

Question

Does the supply curve shift as a result of changes in price or quantity supplied?

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Answer

Supply curve does not shift when the price of a good changes. Supply curve shifts only if the economic factors other than the price change.

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Question

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

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Answer

Rightward

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

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Answer

Decreases

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Question

True or false: price of the product or service is one of the factors that directly cause sideward shifts of its' supply curve.

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Answer

False. Changes in price of the product/service do not reflect in sideward shifts of the supply curve.

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Question

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

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Answer

Consumers' preferences

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Question

Suppose there is a significant increase in the price of steel, which is one of the inputs that producers of cars use in their production. This increase in price of steel would likely shift the supply curve for cars...

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Leftward

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Suppose that the latest advances in technology allow producers of certain physical products to reduce their energy expenses in the production process. As a result, the supply curve of such producers would shift...

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Rightward

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When the price of a complementary good increases, quantity supplied of the complemented good will likely...

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Increase

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When the price of a substitute good decreases, the supply curve for the substituted good will likely shift...

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Rightward

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Since a higher number of producers in the market results in higher quantities of a good or service supplied, a decrease in the number of producers would shift the supply curve...

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Leftward

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Question

If producers expect unfavorable market conditions for their good or service in the near future, what may happen to the quantity they supply and the respective supply curve?

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Answer

Supply curve will shift leftward causing the quantity supplied at every price level to decrease.

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Question

Suppose producers have a reason to believe that the price for their good or service may increase in the near future. How will this affect the supply curve?

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Answer

Favorable market conditions would result in supply curve shifting rightward, resulting in more quantity supplied at every price level.

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Question

If producers experience a raise in taxes on some of their inputs, the supply curve for their ultimate product will likely shift...

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Leftward

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If producers begin to receive subsidies for their product, this will likely compel them to...

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Increase quantity supplied

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Question

If a supply curve shifts rightward, how will the shift affect the price value that corresponds to the market equilibrium, all other things held constant?

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Answer

The new equilibrium price will decrease from the initial value before the shift.

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