Shifting Supply - Online Tutor, Practice Problems & Exam Prep

Supply can shift due to various factors, including input costs, technology, taxes, subsidies, and producer expectations. A decrease in input prices typically increases supply, while an increase in taxes raises costs, reducing supply. Technological advancements enhance production efficiency, leading to greater supply. Additionally, if producers anticipate future price increases, current supply may decrease. The number of suppliers also directly affects supply; more suppliers result in increased supply. Natural events can positively or negatively impact supply, depending on their nature.

Shifting Supply - Warning!

So in the same manner that we were shifting demand, now we're going to find the factors that shift supply. So again, I have this warning here, right, that a change in price does not shift the supply curve, right? It's already a variable on our graph, right? Our axes are price and quantity, so price changes are not going to make us draw a new supply curve. Let's go ahead and move into this box, and we'll do an example. So a change in price. When we see a change in price, what's going to happen? We have our supply curve here, our price, and our quantity axes. Right? And let's say we started at this price right here in the middle. That was our original price and our original quantity. So original price p₁, our original quantity q₁, and now let's say that the price of the product decreased. Right? So now we're going to be at this price right here or excuse me this price down here p₂ and let's see what happens. So, notice the price changed. We're not drawing a new graph, a new line, we're just moving along the supply curve that's already there, right? So the quantity is going to decrease just like the law of supply tells us because the price decreased, right? We're staying on the same line, just moved to the left there on the line. Cool. So let's compare that to when other determinants of supply change right. When we have some of the factors that are going to shift the graph. So, let me get out of the way here and let's do an example of a supply shift. So if we're going to shift the graph, let's say some factor causes a good thing to happen in supply and we're going to shift the graph to the right, we would draw a new line parallel to the one that's already there and that is going to be our new supply. So where this was supply 1, this is supply 2 over here, right, and we have effectively shifted to the right in this situation. So, when notice that when we have a change in price, what we're going to have is an increase or decrease in the quantity supplied. Right. This goes hand in hand with our discussion about quantity demanded versus demand. This is quantity supplied versus a change in supply here on the right-hand side, right. So when we draw a new line, it's as if we have a change in supply. When we're just moving along the line because of a change in price, it's a change in quantity supplied, right. And I have these notes about all else equal, all else not equal, just like with demand, right. We're holding everything equal when we do our analysis. So when we just have a change in price, pretty simple. Everything's equal except for that change in price. We're holding all else equal and over here we're still holding all else equal, it's just that this one factor changed. So if nothing else changes except this one factor, what's going to happen? Well, we're going to shift the line like this. Cool? Alright. Let's finish up this page on the next video.

Shifting Right and Shifting Left

So just like we did with demand, we're going to do the same thing with supply, thinking of shifts to the right as good things happening for supply and shifts to the left as bad things happening for the supply of our product, right? So, when something good happens for the supply of the product, we are going to shift to the right. For example, what if the inputs, the things that we use to create the products, what if they get cheaper? That's going to shift our supply line to the right. That's a good thing for the supply and it'll shift to the right. I just want to make this quick note, if we have this price, and this is our quantity, we're at this price right here, p1. Notice, the price doesn't change, but what happens at this price? Originally, we were going to be at this quantity right here, supplying this quantity, but now, since whatever factor caused the supply to shift to the right, such as cheaper inputs, then at that same price, we're willing to create that much more quantity supplied. Notice, we're keeping the price constant there, but the quantity supplied is increasing because the supply curve shifted.

Just like that, let's do the opposite with the shifting left, right. This is when a bad thing happens to supply, like the input prices going up. So we would shift to the left in this case, and I'll draw a graph something like that, right, and we have effectively shifted to the left here. It's the same discussion there except now we would have a smaller quantity supplied at the same price. Cool, so this is how we're going to be shifting. Now, let's learn about what are those factors that are going to be shifting our supply. Alright, let's do it.

Input Prices

One factor that can shift our supply is the cost of the inputs for the product. Changes in the price of the inputs such as the cost of labor or the cost of the raw materials being put into the product are going to affect the goods supply. This should logically imply that if the input prices are increasing for our product, then the supply of our product is going to decrease, right? These are inversely proportional. One goes up, the other goes down, so you can imagine if the input prices were to go down, then the supply would increase. That makes sense, right? If it got cheaper to make it, we're going to make more of them. Alright. And I want to note right here, just as I've been making, is that we're not making a change in price here, right. We are talking about prices, but this isn't a change in the price of the final product we're selling, right? This is a change in the input prices, what we're putting into the product. Cool.

Here are some examples of input price changes:

1. A very common one is when minimum wages increase. If minimum wage increases, that means that our supply will decrease, right? So, let's say wages up, supply down. This is pretty general and could work in pretty much any industry. If the labor cost goes up, you'll see the supply decrease.
2. Price of gasoline. This is a common input in a lot of product manufacturing. We need gasoline to fuel our machines, so if the price of gas goes up being an input into our product to run our machines or whatever it's going to be, we're going to see the supply go down. Conversely, if the price of gas were to go down, then that means our inputs got cheaper so our supply would go up.
3. Price of microchips. Let's say we make computers, so if the price of the microchip goes down, the supply of computers is going to go up. The inputs for the computer got cheaper, so the supply is going to increase.

Let's go ahead and do an example.

Technology

So, changes in levels of technology are also going to affect the supply for a good. Generally, we're going to see technology only increasing, right? The availability of technology is usually only going up, so we've never seen a problem where technology decreases. I don't know, maybe like a Y2K problem or something, but the idea here is if technology increases, supply will increase, right? So, this kind of goes hand in hand with the input prices, right? This is just making production more smooth, more efficient, so we're going to be able to create more of the product, right? So, pretty much a simple idea here. Let's look at some examples of technology increases. We've got wireless technology coming out, right, so we've seen that in recent years. The Industrial Revolution was a huge increase in productivity based on new technology and how about one, movie rental. The movie rental industry saw a great change in technology when Netflix came out. It totally changed the supply of being able to rent movies. Before, we had to go to a Blockbuster, go to a store, and pick out a movie. Now, all the movies were available online, or at least a really good selection of movies available online through these streaming services, right? So, these basically expanded the supply based on the technology increases. Cool. Pretty simple one. Let's go ahead and do an example.

Technology

Alright, so a new super pizza oven has revolutionized the time it takes to bake a stuffed crust pizza. Stuffed crust pizzas can be hot and ready in less than one minute. Wow, what happens to the supply of stuffed crust pizzas? So in this question, what we have is an increase in technology, right? Pizza industry, so I'll put tech up, and when technology gets better, that's a good thing for the industry, right? That makes our supply go up as well. So we are going to shift to the right. We'll have a new curve here, and that will be our new supply curve shifted to the right. Cool? So technology increased, supply increased. Easy enough. Alright, let's move on to the next one.

Taxes and Subsidies

Now let's see how taxes and subsidies can affect the supply of a good. So let's start with taxes. When we think about taxes from the business standpoint, it's just another cost, right? So we could almost think of this as an increase in the input cost like we already discussed, right? So it's an increased cost, tax is going up, and supply will decrease, right. It's like our costs are going up, so we are going to supply less. They have that inversely proportional relationship. And on the opposite side, subsidies are basically like a reverse tax; that's why, instead of paying the government money, the government gives you money. So when subsidies increase, then the supply is going to increase as well. So here we have a directly proportional relationship, right. So this is a good thing. The government's giving us money. It's a good thing for supply.

Here are some examples of some taxes and subsidies to consider. How about school funding? The government gives a lot of money to universities and public schools. What if the funding increases? Then we're going to see the supply of public education increase as well. And a very common place you see subsidies is in the agricultural business. A lot of times the government will subsidize farmers because they want to make sure that there is food for the citizens. So you'll see that there are agricultural subsidies, given quite often. You can imagine that if a subsidy increases or if a new subsidy arises in the industry, you're going to see supply increase as well. Cool. So let's go ahead and do an example.

Taxes and Subsidies

Alright. The new president of a well-known country has decided to slash funding for the arts. What will happen to the supply of arts education? So let's see what happens here. This funding for the arts, art education, was like a subsidy that arts education was receiving, right? So you could imagine that the subsidy here being the funding from the government is decreasing. Since the subsidy is decreasing, we are going to see the supply decrease as well. So, if this was our original supply curve for the supply of arts education, this could be our new supply curve here to the left. Let me draw it a little more parallel. Cool. So, what has happened is we've moved to the left. It was a bad thing for arts education for this new president to come into office. Alright, so pretty easy. You saw the subsidy decrease, so the supply decreased as well. Alright? Let's move on.

Substitutes in Production

So we saw how the change in the price of related products like substitutes and complements can affect demand. Now we're going to see how prices of related products can affect supply as well. In this case, we're talking about substitutes in production, where instead of buying butter, we're going to buy margarine because it didn't make a difference to us. Now, our factories are usually set up to make more than one thing. So instead of making one product, when we hear that another product has a price increase, we might make that other product instead, right? Does that make sense? We'll do some examples here. The idea is that when the price of a substitute in production increases, the supply of the original product will decrease. Let me demonstrate this, alright?

Alright, so we've got an inversely proportional relationship here, and note again that this is not a change in the price of our product. It's a change in the price of a related product, not our product's price. When we have that change in price, that is when we just move along the supply curve, but in this case, it's not a price change of our product, it's a price change of another product. Here are some examples of possible substitutes in production. There's no hard and fast rule, but these are items that could probably be produced in the same factory with minimal changes to the factory.

The first one will be basketballs and volleyballs. Let's say that the price on the market, the price consumers are paying for basketballs, goes up. Then the supply of volleyballs is going to go down, right? Assuming that they are substitutes in production, which we're going to assume in these examples. So instead of making volleyballs, since the price for basketballs went up, the manufacturers are going to stop making volleyballs and start producing more basketballs instead.

Same scenario with corn and wheat. Let's do the opposite this time. Let's say that the price of corn went down. What's going to happen to wheat assuming they're substitutes in production, which probably makes sense, right? A farmer could grow corn or wheat on the same land. I don't know too much about farming; it's not my expertise, but let's go ahead and state that if the price of corn were to go down, being substitutes in production, we're going to see the supply of wheat going up. That's because the farmers are going to say, "Hey, corn is not as profitable anymore, let's go ahead and plant wheat instead."

Lastly, consider pizzas and calzones, similar dynamic. If the price of pizzas were to go up, people would make fewer calzones and produce more pizzas, hence the supply of calzones is going to go down. Notice how those price changes are not in the product that we're talking about the supply for; it's in the other substitute, the substitute in production. Cool? Let's try an example.

Substitutes in Production

A company that produces peanut butter is also equipped to make almond butter. The company noticed that the prices of almond butter are rising. So, let's start with (a), what will happen to the supply of peanut butter? We know that they are substitutes in production. They made the reference in the question that they are also equipped to make almond butter. We know that the price of almond butter is rising, right? So since the price of almond butter is rising, they're not going to make peanut butter anymore. They're going to say, "Hey, I'd rather make almond butter than peanut butter." So, they're going to switch their production, they're going to substitute it to making almond butter instead. So the supply is going to go down for peanut butter. Alright. So let's go ahead and do this on the graph, right? So in the market for peanut butter, this was a bad thing for peanut butter because they're going to prefer to make almond butter instead. So, we are going to have a shift to the left. So I'm going to draw a new demand, a new supply curve here to the left of this one, and that will be our shift to the left for peanut butter. Cool?

Alright, let's try the same thing with almond butter. So now let's think about this. Let me get out of the way. We've had a price increase in almond butter and hopefully, you guys remember this trick from when we were studying demand, but we are talking about the supply of almond butter and all that's happened is a price change of almond butter, right? So nothing else has happened in the market for almond butter other than the price has increased. So we're not going to draw a new supply curve, right? We are actually just moving along the supply curve. So this is our quantity axis. Right. So we had a price here and a quantity here and it told us that the price of almond butter increased. So now we've got a price up here. And the quantity out here, right? The price increase and this goes along with our law of supply that since the price of the product increased, the quantity supplied is going to increase as well, right. So hopefully that one didn't catch you because we've had a couple of tricks like that already when we were studying demand and if it did, make sure you really focus on that, right? Those changes in price of a product are only going to shift us along the line. Alright, cool. Let's move on to the next topic.

Producer Expectations

Another factor that can shift supply is the producers' expectations about future prices. So we saw this with demand, right, where there were expectations the consumers had about future prices. Well, the producers can also have expectations just the same. We're going to see there is a little trick here. It's not as straightforward, but in general, what we're going to say is if suppliers expect prices to increase in the future, the supply for the good today will decrease. Okay. And this is generally what happens, but I want to put, let's say, a big bold question mark out here. Alright, and I'm going to circle it because I'm going to discuss that once we get to the example that there could be a situation where supply is actually going to increase, but they would have to be very specific to tell us that, right. So in general, we're going to see that when the expected price is increasing in the future, we're going to decrease the supply today, right? So I mean producer expectations, it's hard to think of examples. It's really just that they're expecting the prices to change, right? So if they're expecting the price to change, then we're going to see a problem like this. Okay. I think we're going to get a lot of value out of this example and you'll see how the two different ways we can interpret this come into play. Alright? So let's move on to the example.

Producer Expectations

Alright, so here we go. Señor Coffee makes artisanal coffees in an underdeveloped part of town when all of a sudden a relentless mob of hipsters moves into the neighborhood. Señor Coffee knows that hipsters will pay way too much for artisanal coffee and expects future prices in the artisanal coffee industry to rise. So there we go, we've gotten that note right there. Expected future prices in the artisanal coffee industry are expected to rise. The expectation of price is that it will go up. Alright, so remember I said this one could be a little tricky, but in general what we'll see is that supply would decrease now because of the expected price increase and that kind of makes sense, right? Oh, the price is going to be higher later, let me hold my stuff now and sell it when the price goes up. So let's look at A and B here and you can see how it could be possible that supply could actually shift to the right in this situation. So in A, what happens if Señor Coffee stores some of his current production for sale when the price increases or when prices increase. And this is what you'll usually see is this example where we're going to have supply decreasing currently because they're waiting for the price increase right. So in this situation when he puts some of his current production into storage, we're going to see this shift to the left. Alright. And this is generally what you're going to see is this shift to the left, but I wanted to expose you to this other one just so it doesn't catch you off guard if your teacher wants to throw you a curveball, right? So we had our supply shifting to the left there because he puts it in storage, but what happens to the supply of artisanal coffee if Señor Coffee hires another worker to anticipate demand. So now he's not putting his stuff away, he's actually producing more because he's expecting that higher price and in that situation, we're gonna shift to the right. So notice right, we could have shifted to the left or to the right and it's all how the problem was stated, but they would have to be very explicit if it was this second situation of the hiring of a worker, right? In general, what you're gonna see is this. We're gonna see this happening over here, right, and I'm gonna circle that one just because that is what I would expect you to see. I just wanted to expose you to this because it could be a trick question, right? So that is how expected prices can affect the supply here. Cool? Alright. Let's move on.

Number of Suppliers

So just like we saw the number of consumers in a market can shift demand, the number of suppliers in a market can shift supply. So pretty straightforward, if the amount of suppliers in a market increases, the supply for that good will also increase. Alright, and that makes sense, right? There's more people making the product, so there's just going to be more supply of the product. They're directly proportional. The number of suppliers in the number of suppliers. A really good one was the WNBA. When the WNBA was created, the supply of women's basketball games went up, right? There was an increase in the number of suppliers of women's basketball games, and now the supply of women's basketball games went up. So, what if, like this other example, let's say tattoo parlors open up on every corner of your town, right? Now there's a lot of tattoo parlors, so you imagine the supply of tattoos has also gone up. Just a random example there. Cool, so this one's pretty straightforward. Let's go ahead and try this on the graph.

Number of Suppliers

Alright. So we've got an example here. Jimmy Freezer sells ice cream in a small town. All of a sudden, it seems like everybody and their moms are selling ice cream on every corner. What has happened to the supply of ice cream? So, in this situation, what we see is an increase in the number of suppliers, right. So the number of suppliers is up, and when the number of suppliers go up, is that a good thing for the supply of the product or a bad thing for the supply of the product? That sounds like a good thing, right? Logically thinking even before our discussion we just had. So the number of suppliers goes up, we're going to see the supply of the product increase as well. So if that's our original supply for ice cream, we would draw a new one to the right because this was a good thing for the supply of ice cream. Right, so we've shifted to the right, and that is because the number of suppliers of ice cream increased, causing our supply to increase. Cool? Alright. Let's move on then.

Nature

Alright, so another factor that can shift supply is events in nature. Let's check it out here. So nature can have positive or negative effects on supply, right. It's kind of hard to gauge without examples, but the idea is if there's some sort of positive event in nature, that's going to increase the supply for the good, right. We've got this directly proportional relationship where it's a positive event in nature, a good thing happening in nature, good for the supply. So maybe like you run a wind farm or something and it's been really windy, extraordinarily windy, the supply of energy from your wind farm is going to increase, right? Something like that. So we basically break down our events in nature into 2 things: good weather and bad weather, right? So if there's good weather, that's a good thing, right? That's going to be good for supply. If there's bad weather, that's a bad thing. It's going to be bad for supply, right? So we've got to get the context from the question, and let's go ahead and do an example so we see these on the graphs.

Nature

Alright, so let's try this example. It seems like all season long, the ideal amount of sunshine and rain has graced the farmlands in Iowa. So how will this affect the supply of wheat? So I guess we're assuming Iowa is producing a lot of wheat. I don't know if that's true or not, but let's go ahead and say that they are. Alright, so we have a positive event in nature, so I'm going to say nature up. That's a good thing in nature, then we are going to say that our supply will increase in this case. Right. The sunshine and the rain being perfect, it's going to make the crop extraordinary this year, right. Something like that. So, we are going to see that with the sunshine, we're going to shift our supply curve to the right just like that, and that is because a good thing has happened for our product. Now, what about B? What if, instead of sunshine and rain, a meteor struck a different farm in Iowa every day of the season? Man, Iowa would have been really unlucky that year, but you could imagine that this is a negative event in nature, right? So, this is nature I'm going to put nature down, supply down, right. So, this is a negative thing happening in nature, this is a bad thing for the supply of wheat, so we are going to shift to the left. Right, so you can imagine that these are pretty easy to catch, right? You're going to see whether it's a good thing or a bad thing based on the context in the question. So, this will shift our supply to the left there. Cool? Alright, that one's pretty easy. Let's go ahead and move on.

Here’s what students ask on this topic:

What factors can cause a shift in the supply curve?

Several factors can cause a shift in the supply curve. These include changes in input costs, technological advancements, taxes, subsidies, producer expectations about future prices, the number of suppliers, and natural events. For example, a decrease in the cost of raw materials or labor can increase supply, shifting the supply curve to the right. Conversely, an increase in taxes or input costs can decrease supply, shifting the curve to the left. Technological improvements generally enhance production efficiency, leading to an increase in supply. Additionally, if producers expect higher future prices, they might reduce current supply. The number of suppliers also affects supply; more suppliers typically increase supply. Lastly, natural events like good weather can boost supply, while bad weather can reduce it.

How do changes in input prices affect the supply curve?

Changes in input prices directly affect the supply curve. If the cost of inputs such as raw materials or labor decreases, the supply curve shifts to the right, indicating an increase in supply. This is because it becomes cheaper to produce the goods, encouraging producers to supply more at the same price levels. Conversely, if input prices increase, the supply curve shifts to the left, indicating a decrease in supply. Higher input costs make production more expensive, leading producers to supply less at the same price levels. This relationship is inversely proportional: as input prices go up, supply goes down, and vice versa.

How do technological advancements impact the supply curve?

Technological advancements generally lead to an increase in supply, shifting the supply curve to the right. Improved technology enhances production efficiency, allowing producers to create more goods at a lower cost. For example, the introduction of automation in manufacturing can significantly boost output while reducing labor costs. Historical examples include the Industrial Revolution, which saw massive increases in production due to new machinery and processes. More recently, advancements in wireless technology and streaming services have expanded the supply of digital goods and services. Overall, better technology makes production more efficient, increasing the quantity supplied at each price level.

What is the effect of taxes and subsidies on the supply curve?

Taxes and subsidies have opposite effects on the supply curve. An increase in taxes is akin to an increase in production costs, which shifts the supply curve to the left, indicating a decrease in supply. Higher taxes mean higher costs for producers, leading them to supply less at the same price levels. On the other hand, subsidies act like a reverse tax, effectively reducing production costs. When subsidies increase, the supply curve shifts to the right, indicating an increase in supply. Subsidies provide financial support to producers, enabling them to supply more goods at the same price levels. This relationship is directly proportional: higher subsidies lead to higher supply.

How do producer expectations about future prices affect current supply?

Producer expectations about future prices can significantly impact current supply. If producers expect prices to increase in the future, they may reduce the current supply to sell more at the higher future prices. This behavior shifts the current supply curve to the left. Conversely, if producers expect future prices to decrease, they might increase the current supply to sell more before prices drop, shifting the supply curve to the right. However, this general rule can have exceptions based on specific market conditions and producer strategies. Overall, expectations about future prices influence producers' decisions on how much to supply in the present.