Economics Micro & Macro (CliffsAP)

Figure 2-4

The Six Determinants of Supply

The following six factors shift the supply curve (in other words, change supply) either to the right (increase) or to the
left (decrease): input prices, producers’ expectations, technology, the change in the price of other goods, the number of
suppliers, and government.

Input Prices

A firm’s production costs dictate its supply curve. If a firm produces pencils and the price of lumber rises, then the firm
has no choice but to either cut back on its production of pencils or raise the price for its pencils. Either option changes the
firm’s supply curve. If the cost of land, labor, or capital increases or decreases, a firm’s supply curve will shift accordingly.

Producers’ Expectations

Sometimes producers can anticipate a change in the price of raw materials. When this occurs, the producers’ supply
curve shifts accordingly. If an orange producer is expecting a bad winter, then it may try to harvest more oranges to com-
pensate for a future shortage. The supply curve for the producer (all other things held constant) will shift to the right.

Technology

A change in technology makes production costs less expensive. If a new type of recyclable oil is invented, how do you
think it would affect the supply for oil? The supply curve for oil would shift to the right, and oil would become cheaper
because of a surplus. Technology improves efficiency, and efficiency allows producers to use their raw materials with
lower opportunity costs.

A Change in the Price of Other Goods

If a supplier made hot dogs and buns and the price of hot dogs rose as a result of an increase in demand, the supplier
could opt to make fewer buns and more hot dogs.

The Number of Suppliers

When more suppliers enter the market, the supply for that particular good increases (depending on how easy it is to enter
the market). When the supply increases, the supply curve shifts to the right.

Quantity

Increase In Supply Quantity

(Shift To Right)

Supply Curve

S^1

S^2

Price

Quantity

Decrease In Supply Quantity

(Shift To Left)

S^1

S^2

Price

Supply and Demand