ECON 09/15: What Shifts a Supply Curve?

Labor Market Perspective: We are all sellers

• In this framework, you are part of the labor market as a seller of labor or services.

• The firm (employer) is the buyer; they hire your labor and pay your wage.

• The wage is the price of your labor or service.

• You supply your labor; you are selling a service (even if not for money, e.g., helping family or volunteering). The resource you receive in return may be money or other resources, but the decision logic is the same: you exchange your time/service for resources.

• The idea extends to students: you sell your time to learn/attend class, and you reuse that knowledge later to buy other goods or services.

• Four core principles guide seller decisions: weigh costs vs benefits, consider marginal costs and marginal benefits, and apply old decision-making rules consistently.

• This chapter follows the same outline as the previous one, but applied to supply: from individual supply to market supply.

Core ideas and outline for the chapter

• Section 1: Individual supply (diagonal/upward-sloping curve)

  • Build the supply curve from a table; the same table/problem as a demand-side counterpart, but mirrored for supply.

  • The individual supply curve generally slopes upward: as price increases, quantity supplied increases.

• Section 2: Decisions and the individual supply curve

  • Explain why supply is upward-sloping: increasing marginal cost as output expands.

  • This gives rise to the shape of the supply curve (upward). It’s a typical tendency, not a universal truth.

• Section 3: Market supply

  • Market supply is the horizontal summation of individual supplies: add up each seller’s quantity at a given price.

• Section 4: The five shifters of supply (IPPET)

  • IPPET stands for Input cost, Productivity/Technology, Price of related outputs, Expectations, and (Number of) Producers (sellers) – i.e., the number of sellers.

  • These factors shift the entire supply curve; unlike a movement along the curve, they change the position of the curve.

• Section 5: Shift vs movement along the curve

  • Movement along the curve occurs when the price of the current good changes.

  • A shift occurs when one of the IPPET factors changes.

• Additional topics (some concepts are shared with demand):

  • Innovative supply and how innovations affect decisions; the supply curve remains a function of price and marginal cost.

  • How to draw the supply curve from price-quantity data: same approach as demand, but focus on quantity supplied for given prices.

  • The typical property: the supply curve tends to turn upward due to increasing marginal costs, but there are exceptions (e.g., learning-by-doing can create a U-shaped or decreasing segment early on).

The law of supply and its nuances

• Law of supply (typical tendency): when the price of a good or service rises, quantity supplied tends to rise, holding other factors constant.

  • Intuition: higher price provides greater incentives to produce/sell more.

• Exceptions to the standard upward trend (exam caveats):

  • Timing-of-scale (learning-by-doing) effects can yield a non-monotonic, e.g., a V-shaped curve in some scenarios where initial output is costly but later output rises with experience.

• Core relationship for marginal analysis:

  • Producers compare marginal benefits and marginal costs; they continue producing until the marginal benefit equals the marginal cost.

  • In a market with price-taking sellers (perfect competition), the price acts as the marginal benefit and equals the marginal cost at equilibrium: $P = MC.$

• Conceptual link: price, marginal cost, and production decisions.

Cost concepts: fixed vs variable and marginal cost

• Fixed cost (FC): costs that do not vary with the quantity produced.

  • Examples: rent, CEO salary (in the short run).

  • FC does not change as output changes; it should be ignored when calculating marginal cost (MC).

• Variable cost (VC): costs that vary with quantity produced.

  • Examples: wages of workers, materials, energy per unit produced.

  • VC is included in the calculation of marginal cost.

• Marginal cost (MC): the additional cost to produce one more unit of output.

  • MC rises with more output when there are diminishing marginal returns to inputs (increasing marginal cost).

• Relationship to price and decision-making:

  • A firm expands output until marginal cost equals marginal benefit (price in a perfectly competitive market): $P = MC.$

• Illustrative note on scale and production costs:

  • As output increases, you typically need to hire more inputs or expand capacity, which increases MC due to diminishing marginal product and/or capacity limits.

Intuition through a classroom demonstration of increasing marginal cost

• A resource-availability game (resource scarcity) helps illustrate why MC increases with more output:

  • As you chase scarce resources (e.g., bricks, wool, etc.), locating additional resources becomes harder and costs rise.

  • Early settlements can be built with abundant resources; later settlements face higher marginal costs due to scarcity.

• This scarcity-driven logic explains why the supply curve slopes upward in the simple model.

• Takeaway: increasing marginal cost underlies the upward slope of the supply curve and the rationale for producing more only when price (benefit) justifies higher costs.

Productivity, technology, and related factors that shift supply

• Productivity and technology (improved efficiency) tend to reduce marginal cost, shifting the supply curve to the right (more supply at every price).

• Input prices and input costs shift supply:

  • An increase in input prices raises marginal cost, shifting supply to the left (less supply at every price).

  • A decrease in input prices lowers marginal cost, shifting supply to the right.

• The distance of the vertical shift can be interpreted as the amount of the change in marginal cost due to the input price change.

• Productivity improvements can come from technology, tools (e.g., AI), or better processes that make workers more productive at the same wage, increasing supply.

Prices of related outputs in production (IPPET’s third driver)

• Price of related outputs can affect supply via the concept of substitutes and complements in production:

  • Complements in production (byproducts): If producing one good creates a byproduct that has value, an increase in the price of the primary byproduct can raise overall supply of both products depending on the production process.

  • Substitutes in production: If two outputs compete for the same inputs or production capacity, an increase in the price of one output leads to more of that output and less of the other (the production line is reallocated).

• Examples from the lecture context:

  • If the price of one output rises, producers may reallocate resources to produce more of that output and less of the other substitutes in production.

  • Be aware of the distinction: prices of related goods in production influence supply decisions for the goods in question.

• This driver helps explain why supply can react differently to price changes for related outputs, not just the price of the good itself.

The fifth shifter: expectations and the number of sellers

• Expectations about future prices influence current supply decisions:

  • If prices are expected to rise in the future, producers may restrict current supply (store inventory) and sell more later at higher prices.

  • If prices are expected to fall, producers may release more now to take advantage of current higher prices.

• The number of sellers in the market also shifts supply:

  • More sellers (more firms) -> greater market supply at each price (rightward shift).

  • Fewer sellers -> lower market supply (leftward shift).

• These factors complete the IPPET framework for supply shifters.

Input prices, production decisions, and the magnitude of shifts

• Input price changes: A fall in input prices increases supply; a rise reduces supply.

• The magnitude of the shift is tied to how much MC changes for each unit of output; graphically, you can think of the entire supply curve moving up or down by the amount of the change in variable input costs.

• Productivity/technology updates: A given price yields more output due to lower MC, shifting the curve to the right.

• Prices of related outputs: Changes can cause increases or decreases in supply of the target good depending on whether the related outputs are substitutes or complementary outputs in production.

• Expectations and number of sellers: Changes in expectations and changes in the number of sellers shift the entire curve accordingly.

Substitutes and complements in production (detailed intuition)

• Substitutes in production (competitive outputs): When two outputs compete for the same resources, increasing the price of one output tends to increase its supply and decrease the supply of the other output.

  • Example idea: If a factory can produce either A or B on the same line, a higher price for A leads to more A and less B.

• Complements in production (byproducts): Some production processes generate two or more products; an increase in the price of one product can incentivize higher production of both if both are tied to the same input or process.

• The key point: IPPET helps you remember that price changes in related outputs can shift supply for the goods in question, either positively or negatively depending on whether the relationship is substitutive or complementary in production.

Shifts vs movements along the supply curve: a concrete example

• Movement along the curve:

  • When the price of the current good changes, you move along the existing supply curve to a new quantity.

  • Example: Corn market response to a higher price for corn leads to a higher quantity supplied along the same corn supply curve.

• Shift of the supply curve:

  • When any IPPET factor changes (input price, productivity, price of related outputs, expectations, number of sellers), the entire supply curve shifts left or right.

  • Example: If the price of corn increases and corn and potatoes use substitutes in production, the supply of potatoes may shift due to reallocation of production capacity; the exact directional shift depends on the substitution/complement relationship.

Practical takeaways for exam-style questions

• Expect questions that ask you to identify which factor shifts the supply curve and in which direction:

  • Input price change: lower input prices shift supply right; higher input prices shift supply left.

  • Productivity/technology improvement: shift right (more supply at each price).

  • Price of related outputs (substitutes in production): if the price of one good rises, supply of the other good may fall (shifts left) and vice versa; for complements, supply may rise for both if tied by byproduct relations.

  • Expectations about future prices: higher expected future price can reduce current supply; lower expected future price can increase current supply.

  • Number of sellers: more sellers shift supply right; fewer sellers shift supply left.

• Be able to explain why the supply curve generally slopes upward: due to increasing marginal costs as production expands (scarcity and diminishing marginal product).

• Distinguish between fixed and variable costs for MC calculations:

  • Do not include fixed costs in the calculation of marginal cost.

  • Include variable costs (labor, materials) in MC.

• Remember the key equation in perfect competition: $P = MC$ at the quantity supplied, and the price is given to the seller (they are price takers).

• Understand that the graph's vertical distance between shifted supply curves equals the magnitude of the cost change (e.g., a ${2}$ change in input price shifts the curve up by $2$ units of marginal cost).

Quick recap of key formulas and concepts

• Marginal decision rule (general): continue producing as long as marginal benefit ≥ marginal cost; stop when MB = MC.

• In perfect competition: price equals marginal cost at the optimum: $P = MC.$

• Price, marginal cost, and marginal benefit relationship can be summarized as:

  • For a profit-maximizing producer in a competitive market: $P = MC.$

• Cost categorization:

  • Fixed cost: $FC$ (independent of output)

  • Variable cost: $VC(Q)$ (depends on quantity)

  • Marginal cost: $MC(Q) = rac{dVC}{dQ}$ (the derivative of VC with respect to quantity)

• Shifters of supply (IPPET):

  • Input cost, Productivity/Technology, Price of related outputs, Expectations, Number of sellers (producers).

  • Each can shift the supply curve left or right depending on the direction of the change.

Anecdotes and classroom context (note on digressions)

• Some portions include classroom anecdotes and conversational interruptions that illustrate the real-world context of pricing and labor markets, but the core material focuses on supply, costs, and the IPPET framework.

• A short classroom exercise illustrated scarcity and increasing marginal costs through a resource-building game, reinforcing why MC rises with output.