Shifts of the Supply Curve
- There are several factors that will change the supply of a good/service, irrespective of the price level. Collectively these factors are called the conditions of supply
- Changes to any of the conditions of supply shifts the entire supply curve (as opposed to a movement along the supply curve)
A graph that shows how changes to any of the conditions of supply shifts the entire supply curve left or right, irrespective of the price level
- For example, if a firm's cost of production increases due to the increase in price of a key resource, then there will be a decrease in supply as the firm can now only afford to produce fewer products
- This is a shift in supply from S to S1. The price remains unchanged at £7 but the supply has decreased from 10 to 2 units
- This is a shift in supply from S to S1. The price remains unchanged at £7 but the supply has decreased from 10 to 2 units
An Explanation of How Each of the Conditions of Supply Shifts the Entire Supply
Curve at Every Price Level
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Costs of Production (COP) |
If the price of raw materials or other costs of production change, firms respond by changing supply |
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COP Decreases |
S increases, shifting right (S→S2) |
Indirect Taxes |
Any changes to indirect taxes change the cost of production for a firm & impact supply |
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S decreases, shifting left (S→S1) |
Taxes Decrease |
S increases, shifting right (S→S2) |
Subsidies |
Changes to producer subsidies directly impact the cost of production for the firm |
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S increases, shifting right (S→S2) |
Subsidy Decreases |
S decreases, shifting left (S→S1) |
New Technology |
New technology increases productivity and lowers costs of production. Ageing technology can have the opposite effect |
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S increases, shifting right (S→S2) |
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S decreases, shifting left (S→S1)) |
Change in the number of firms in the industry |
The entry and exit of firms into the market has a direct impact on the supply. If ten new firms start selling building materials in Hanoi, the supply of building material will increase |
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S increases, shifting right (S→S2) |
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S decreases, shifting left (S→S1) |
Weather Events |
Droughts or flooding can cause a supply shock in agricultural markets. A drought will cause supply to decrease. Unexpectedly good growing conditions can cause supply to increase. |
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S decreases, shifting left (S→S1) |
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S increases, shifting right (S→S2) |
Exam Tip
Several of the conditions of supply change the costs of production. However, be sure to explain each condition as its own point before linking it to the cost of production (for example, a change in indirect taxation).
A common error by students is to explain that a subsidy (for example, £3,000 subsidy for each electric vehicle produced) shifts the demand curve for electric vehicles to the right. This is incorrect. The subsidy will shift the supply curve to the right. Then due to the lower price, there will be a movement along the demand curve (extension of quantity demanded) to create a new market equilibrium.