Shifts in the Supply Curve - Online Tutor, Practice Problems & Exam Prep

Supply can shift due to various factors, including input prices, technology, taxes, subsidies, and producer expectations. A decrease in input costs or technological advancements typically increases supply, while higher taxes reduce it. Additionally, if producers anticipate future price increases, current supply may decrease. The number of suppliers also directly affects supply; more suppliers lead to increased supply. Natural events can positively or negatively impact supply, depending on whether conditions are favorable or adverse. Understanding these dynamics is crucial for grasping market equilibrium and the law of supply.

Shifting Right and Shifting Left

So just like we did with demand, we're going to do the same thing with supply and 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 we have something good happen for the supply of the product, we are going to shift to the right. So an example of something good that could happen, what if the inputs, the things that we use to create the product, what if that gets cheaper? That's going to shift our supply line to the right. Cool. So that's a good thing for the supply. It'll shift to the right here and I just want to make this quick note right, 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, right? So notice we're keeping the price constant there, but the quantity supplied is increasing because the supply curve shifted. So 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 price is going up, right. 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. 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.

Technology

So changes in levels of technology are also going to affect the supply of a good. Generally, we're going to see technology only increasing, right? The availability of technology is usually only going up, so I'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. This just makes 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 emerging, 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 more, movie rental. The movie rental industry saw a great change in technology when Netflix emerged. 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 it as an increase in the input cost like we already discussed, right? So, as an increased cost, when a tax goes up, 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 the opposite here, 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, supply is going to increase as well. This results in a directly proportional relationship, right. So, this is a good thing for supply when the government is giving us money.

Here are some examples of taxes and subsidies effects. How about school funding? The government gives a lot of money to universities and public schools. If the funding increases, then we're going to see the supply of public education increase as well. A very common place you see subsidies is in the agricultural business. Often, the government will subsidize farmers because they want to ensure that there is enough food for the citizens. So, you'll see that agricultural subsidies are 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? Let's see what happens here. The funding for the arts, which acts like a subsidy that arts education was receiving, is decreasing. So, you could imagine that with the decrease in government funding, supply will decrease as well. 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. Let's move on.

Substitutes in Production

So we saw how the change in 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 going to be talking about substitutes in production. Instead of buying butter, we're going to buy margarine because, to us, it doesn't make a difference. We're discussing substitutes in production, which means 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, maybe we'll make that other product instead. 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 explain this further.

The relationship here is inversely proportional, and it is important to note again that this is not a change in the price of our product but a change in the price of a related product. When we have a change in price, we just move along the supply curve, but in this case, 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 things that could probably be produced in the same factory with minimal changes to the factory setup.

The first example involves basketballs and volleyballs. Let's say that the market price of a basketball goes up; consequently, the supply of volleyballs is going to go down, assuming they are substitutes in production, which we are assuming in these examples. So, instead of making volleyballs, manufacturers will start producing more basketballs. Similarly, let's discuss corn and wheat. Let's do the opposite this time: if the price of corn goes down, assuming they're substitutes in production, the supply of wheat will go up. This is because farmers might decide that corn is not as profitable anymore, so they will switch to growing wheat instead.

Finally, consider pizzas and calzones. If the price of pizzas were to increase, producers would make fewer calzones and more pizzas, hence the supply of calzones will decrease. Notice how these price changes are not in the product that we're discussing the supply for but in the other substitute, the substitute in production.

Let's try an example to further clarify this concept.

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, what will happen to the supply of peanut butter, and what will happen to the supply of almond butter? Let's start with what will happen to the supply of peanut butter. We know they are substitutes in production. They made reference in the question that they are also equipped to make almond butter, so we know that the price of almond butter is rising. Since the price of almond butter is rising, the company won't make peanut butter anymore. They're going to say, "I'd rather make almond butter than peanut butter." So, they're going to switch their production; they're going to substitute making almond butter instead. So the supply is going to go down for peanut butter. Alright. Let's go ahead and do this on the graph. 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. I'm going to draw a new demand, 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. Now, let's think about this. So, 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 has happened is a price change of almond butter. So, nothing else has happened in the market for almond butter other than the price has increased. We’re not going to draw a new supply curve. We are actually just moving along the supply curve. This is our quantity axis. 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. Oops. And the quantity out here. The price increase goes along with our law of supply that since the price of the product increased, the quantity supplied is going to increase as well. 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. Changes in the 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 producer's expectations about future prices. So, we saw this with demand, 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. Senor Coffee makes artisanal coffees in an underdeveloped part of town when all of a sudden a relentless mob of hipsters moves into the neighborhood. Senor 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, meaning 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 Senor Coffee stores some of his current production for sale when price increases or when prices increase. And this is what you'll usually see as an example where we're going to have supply decreasing currently because they're waiting for the price increase. So in this situation when he puts some of his current production into storage, we're going to see this shift to the left. And this is generally what you're going to see as 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?

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 Senor 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 about how the problem was stated, but they would have to be very explicit if it was this second situation of hiring 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 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 in this other example, let's say tattoo parlors open up in 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 goes up, is that a good thing for the supply of the product or a bad thing for the supply of product? That sounds like a good thing, right? Logically thinking, even before our discussion, we just had. So the number of suppliers go 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. 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. There's bad weather, that's a bad thing. It's going to be bad for supply, right? So we have 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 making 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. 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 prices, technological advancements, taxes, subsidies, producer expectations about future prices, the number of suppliers, and natural events. For example, a decrease in input costs or an improvement in technology typically shifts the supply curve to the right, indicating an increase in supply. Conversely, higher taxes or an increase in input costs shift the supply curve to the left, indicating a decrease in supply. Understanding these factors is crucial for analyzing market dynamics and predicting changes in supply.

How do technological advancements affect the supply curve?

Technological advancements generally shift the supply curve to the right, indicating an increase in supply. This is because new technology often makes production more efficient, reducing costs and allowing producers to create more goods at the same price. For example, the introduction of wireless technology or the Industrial Revolution significantly increased productivity and supply. In the movie rental industry, the advent of streaming services like Netflix expanded the supply of available movies by making them accessible online, eliminating the need for physical stores like Blockbuster.

How do taxes and subsidies impact the supply curve?

Taxes and subsidies have opposite effects on the supply curve. An increase in taxes is akin to an increase in input costs, which shifts the supply curve to the left, indicating a decrease in supply. On the other hand, subsidies act like a reverse tax, providing financial support to producers. This shifts the supply curve to the right, indicating an increase in supply. For instance, agricultural subsidies often increase the supply of food by providing financial support to farmers, ensuring a stable food supply for the population.

How do producer expectations about future prices affect the supply curve?

Producer expectations about future prices can significantly impact the supply curve. If producers expect prices to increase in the future, they may decrease the current supply to sell more at higher future prices, shifting the supply curve to the left. Conversely, if they expect prices to decrease, they might increase the current supply to sell more before prices drop, shifting the supply curve to the right. However, this relationship can be complex and context-dependent, requiring specific information to predict accurately.

How do natural events influence the supply curve?

Natural events can either positively or negatively impact the supply curve. Favorable conditions, such as good weather, can increase supply, shifting the supply curve to the right. Conversely, adverse conditions, like natural disasters, can decrease supply, shifting the supply curve to the left. For example, a wind farm would see an increase in energy supply during a period of unusually high winds, while a drought could reduce the supply of agricultural products.