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Microeconomics: Shift in Supply

We recently talked about the factors that cause a shift in the demand. It is now time to discuss the factors that shift the supply curve which cause the equilibrium price and demand to change.

Determinants of Supply: changes in supply are caused by changes in the price of inputs, the number of firms in the market, technology, changes in the price of related goods and services, and changes in expected prices.
  • An increase (decrease) in the price of an input results in less (more) supply as per unit production costs rise (fall).
  • More competition increases supply, and less competition leads to less supply. If a new firm enters the market for good X, then the supply of good X increases.
  • Improvement in technology can result in an increase in the ability of producers to supply their products. For example, the invention of the printing press increased the supply of books.
  • An increase (decrease) in the price of a related good leads to an increase (decrease) in the supply of the other. Think of by-products, for example molasses and sugar.
  • If producers expect the price of their goods to increase (decrease) they are less (more) willing to sell it now.

Example:

If in a competitive market producers are faced with an increase in rent, then the supply curve will shift. As the average cost (i.e per unit cost) increases, the producers have to produce less given the current prices. Therefore, the supply curve goes from S1 to S2. The new equillibrium price is now higher and the quantity produced is now lower.

Reference: Mayer,David. AP Microeconomics Crash Course. Research & Education Association (2014). p 60-62.

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