curve to the right. As we will see in later chapters, governments often
levy special taxes on the production of specific goods, such as gasoline,
cigarettes, and alcohol. These taxes make the production and sale of these
goods less profitable. The result is that the supply curve shifts to the left.
For other products, governments often subsidize producers—that is, they
pay producers a specific amount for each unit of the good produced. This
often occurs in agricultural markets, especially in the United States and
the European Union. In such situations, the subsidy increases the
profitability of production and shifts the supply curve to the right. For
example, environmental concerns have led the U.S. and Canadian
governments in recent years to provide subsidies for the production of
biofuels. These subsidies have caused the supply curve for biofuels to
shift to the right.
- Prices of Other Products
Changes in the price of one product may lead to changes in the supply of
some other product because the two products are either substitutes or
complements in the production process.
A prairie farmer, for example, can plant his field in wheat or oats. If the
market price of oats falls, thus making oat production less profitable, the
farmer will be more inclined to plant wheat. In this case, wheat and oats
are said to be substitutes in production—for every extra hectare planted in
one crop, one fewer hectare can be planted in the other. In this example,