Objective: Diagrams that illustrate shifts of a supply curve
This section focuses on understanding how the supply curve can shift and the factors that cause these shifts. Shifts in the supply curve lead to changes in the equilibrium price and quantity of a good or service.
Factors Affecting Supply
Several factors can cause a shift in the supply curve. These include:
Cost of Production: This is arguably the most important factor. Higher costs of production lead to a decrease in supply, and lower costs lead to an increase in supply.
Technology: Improvements in technology typically lower the cost of production, leading to an increase in supply.
Expectations of Future Prices: If producers expect prices to rise in the future, they may increase supply now. Conversely, if they expect prices to fall, they may decrease supply.
Number of Sellers: More sellers in the market lead to an increase in supply. Fewer sellers lead to a decrease in supply.
Government Policies: Taxes and subsidies can significantly affect supply. Taxes increase the cost of production, decreasing supply. Subsidies decrease the cost of production, increasing supply.
Natural Events: Events like droughts, floods, or earthquakes can disrupt production and decrease supply.
Diagrams Illustrating Shifts in the Supply Curve
The following diagrams illustrate the impact of different factors on the supply curve.
1. Change in Cost of Production
A change in the cost of production will cause the entire supply curve to shift. An increase in cost will shift the supply curve to the left (decrease in supply), and a decrease in cost will shift the supply curve to the right (increase in supply).
Suggested diagram: A supply curve shifting left due to increased cost of production. Label axes: Price (Y), Quantity (X). Show a supply curve labeled S1 shifting left to S2.
Factor
Effect on Cost of Production
Effect on Supply Curve
Increase in input costs (e.g., wages, raw materials)
Increases
Leftward shift (decrease in supply)
Technological improvement
Decreases
Rightward shift (increase in supply)
Government imposed regulations (e.g., environmental regulations)
Increases
Leftward shift (decrease in supply)
2. Change in Expectations of Future Prices
If producers expect prices to rise in the future, they will increase their current supply. If they expect prices to fall, they will decrease their current supply.
Suggested diagram: A supply curve shifting right due to expectations of higher future prices. Label axes: Price (Y), Quantity (X). Show a supply curve labeled S1 shifting right to S2.
3. Change in the Number of Sellers
An increase in the number of sellers in the market will lead to an increase in the total supply. A decrease in the number of sellers will lead to a decrease in the total supply.
Suggested diagram: A supply curve shifting right due to an increase in the number of sellers. Label axes: Price (Y), Quantity (X). Show a supply curve labeled S1 shifting right to S2.
4. Impact of Government Policies (Taxes and Subsidies)
Taxes: A tax on production increases the cost of production for firms, leading to a decrease in supply. The supply curve shifts leftwards.
Suggested diagram: A supply curve shifting left due to a tax. Label axes: Price (Y), Quantity (X). Show a supply curve labeled S1 shifting left to S2, with a tax represented by a vertical line.
Subsidies: A subsidy reduces the cost of production for firms, leading to an increase in supply. The supply curve shifts rightwards.
Suggested diagram: A supply curve shifting right due to a subsidy. Label axes: Price (Y), Quantity (X). Show a supply curve labeled S1 shifting right to S2, with a subsidy represented by a vertical line.
Impact on Equilibrium
Shifts in the supply curve lead to new equilibrium prices and quantities. A leftward shift in the supply curve leads to higher equilibrium prices and lower equilibrium quantities. A rightward shift in the supply curve leads to lower equilibrium prices and higher equilibrium quantities.
Example
Consider a scenario where there is a significant increase in the cost of oil production. This would lead to a leftward shift in the supply curve for gasoline. As a result, the equilibrium price of gasoline would rise, and the equilibrium quantity of gasoline consumed would fall.