Lesson 2.6: Changes in Supply and Supply Curve Shifts

Flashcards made from a presentation segment created as a lesson on supply curve shifts.

Supply curve

The graphical representation of the supply schedule, showing how much of a good or service producers are willing to supply at different prices

Law of supply

Law that states that all other things being equal, the price and quantity supplied of a good are positively related

Profit maximization

The goal for suppliers, done through matching marginal revenue to marginal cost

• Lower marginal costs stop short of maximizing resource allocation and total revenue

• Higher marginal costs lose money when sold on the market

Supply curve shift

A change in the quantity supplied at any given price, represented by the movement of the original supply curve to a new position as a result of a change in overall supply

Supply curve movement

A change in the quantity supplied of a good that is a result of a change in price, not overall supply

Decrease in supply

A decrease in total levels of supply across the market at all prices, leading to a leftward shift of the supply curve

Increase in supply

An increase in total level of supply across the market at all prices, leading to a rightward shift of the supply curve

Supply curve shift factors

Represented by the mnemonic I-RENT:

• Input prices

• Related goods or services prices

• Expectations of producers

• Number of producers

• Technology changes

Input price changes

Factor in the shift of a supply curve based on a good or service used to produce the end product

• An increase in the price for sugar and cream will lead to lower ice cream supply

• A decrease in the price of oil will lead to higher airline fuel and ticket supply

Related goods or services price changes

Factor in the shift of a supply curve based on substitute or complement price shifts

• Substitute: Less supply in one leads to higher demand (and thus higher prices and supply) in the other

• Complement: An increase in the price of one leads to more supply in the other

Substitutes in production

Products as part of a product’s related goods and services that can shift the supply curve as an increase in the price of one product causes suppliers to supply less of the other (and vice versa)

• Higher heating oil prices and lower gasoline prices will lead producers to supply less gasoline, shifting gasoline’s supply curve to the left

• Lower heating oil prices and higher gasoline prices will lead producers to supply more gasoline, shifting gasoline’s supply curve to the right

Complements in production

Product as part of a product’s related goods and services that can shift the supply curve as an increase in the price of one causes suppliers to supply more of the other (and vice versa)

• Natural gas is a byproduct of crude oil drilling

  • Higher natural gas prices will cause suppliers to supply more crude oil and natural gas

  • Lower natural gas prices will cause suppliers to supply less crude oil and natural gas

Expectations of producers

Factor in the shift of a supply curve based on a supplier’s beliefs of price movement in the future as anticipated higher prices in the future may cause a decrease of supply today (and vice versa)

• Gasoline prices can peak in the summer, leading producers to supply less gasoline in the spring

• Heating oil prices may go down in the spring, leading producers to supply more heating oil in the winter to sell more at higher prices

Number of producers

Factor in the shift of a supply curve based on how many suppliers are in a market

• More widget producers entering the market shifts the supply curve for widgets to the right

• Many widget producers going out of business shifts the supply curve for widgets to the left

Technology changes

Factor in the shift of a supply curve based on production efficiency with new advancements

• A new innovation in gadget production speed can shift the supply curve for gadgets to the right

• The restriction of a pesticide in cotton farming can reduce cotton output, shifting the supply curve for cotton to the left

Governmental policies

Additional factor in the shift of a supply curve based on governmental power to raise or lower the costs of production, thus encouraging or discouraging production abroad

Subsidy

A governmental payment that supports a business or market, thus lowering costs of production and increasing supply

Excise tax

A governmental tax on the production or sale of a good, thus increasing costs and lowering supply

Regulation

A governmental intervention in a market that affects the price, quantity, or quality of a good

Foreign changes

Another determinant of supply curve shifts based on changes in the global economy

• A strike in workers for carpet production in India can reduce the supply of carpets to the United States, shifting the supply curve to the left

• A discovery of oil abroad in Russia can increase the supply of oil to the United States, shifting the supply curve to the right