Source: Image of Supply Graph created by Kate Eskra, Image of Supply Curve Decrease Graph created by Kate Eskra, Image of Supply Curve Increase Graph created by Kate Eskra
Hi. Welcome to Economics. This is Kate. This tutorial is called Changes in Supply and Movements Along a Supply Curve. As always, my key terms are in red and my examples are in green. So in this tutorial, we will be looking at what causes movement along a supply curve, versus what causes that supply curve to shift. They might sound like very similar things, but, in fact, they're quite different.
So by the end of the tutorial, you will understand that a change in price will cause movement along the curve, whereas a change in anything else will change the supply curve itself, OK? So let's get to that first key phrase, which is movement along a supply curve. And this will be movement caused by a change in price, assuming all other variables are held constant.
All right. So let's look at a producer, because we are talking about supply. So let's look at our farmer, here, who is supplying apples to the market. Notice the relationship between price and the quantity that he's willing to supply. And this quantity is in thousands of bushels. I just wanted to simplify it there.
As the price is very high-- that's an expensive apple, $2 per apple that he's receiving-- he's willing to supply a whole lot at that price, because he knows he can make a lot of money. Notice as the price starts to fall, he's willing to supply a lower and lower and lower quantity. Let's look at the graph.
If we plot those points with price on the y-axis and the quantity of apples that he's willing to supply to the market on the x-axis, we notice a positive relationship between price and quantity. So, in fact, he's not willing to supply any apples at all when their only $0.25 per apple. That's where he's just saying, nope, not going to do it. As the price rises, the quantity he's willing to supply will rise. As the price falls, the quantity that he's willing to supply will fall.
And so that really is our law of supply. As the price falls, the quantity he's willing to supply falls, and vice versa is also true. As price rises, the quantity rises. That is what we mean by movement along the curve. As prices change, he's willing to supply a different quantity. So we just move along this curve from one point to the next.
So at a price of $0.25 we're here. At a price of $1 we're here. At a price of $2 we're here. That's moving along this curve. And that assumes ceteris paribus, holding all other variables constant. So like I was just saying, as the price of apples falls we can expect the farmers will supply fewer apples.
The ceteris paribus part of it assumes that only the price of apples has changed. The only reason that he is supplying fewer apples when they drop in price is because they dropped in price. Nothing else changed. So an example of something else would be, the price of their resources or inputs. So for example, his fertilizer didn't get more expensive. His technology did not change. Just the price of apples changed, and so that was what impacted him to supply fewer apples. That's what ceteris paribus means.
So as the price is changing, we're moving along the curve, assuming that nothing else changed. But we know that's not the reality in the world. Things do change, right? So what if something else does change? What if his fertilizer does get more expensive? Or what if you have to, all of a sudden, pay his workers more money, because wages go up? What if something good happens and a really new technology is developed that makes apple picking much more efficient?
Now those are things that we can't just move along the curve. Will farmers still supply the same amount of apples if any of these situations occur? Well, let me show. OK. So let's used the example of an increased cost to our farmer. Maybe his fertilizer did get more expensive.
Notice, at these prices, these are the same prices as I was using before, but now, wow! He's not even willing to supply any apples at $0.50, or at $0.75. He's only willing to supply one at $1, instead of the three before. If we charted these numbers, we can't move along this curve. That relationship doesn't exist between price and quantity anymore.
If we chart these new numbers, it's going to end up in this curve that is to the left of the original one. So like I said, notice the price of apples did not change. But there's a new relationship between price and quantity. Here is where we need a new curve. And this is what we call a shift in the supply curve.
So a shift in supply is defined as "Changes other than the price of the good itself that affect production decisions for a particular good." So what are some things that do you cause a shift in supply? Well, changes in input prices. So what goes into the production process. Land, labor, and capital, remember, are our factors of production. So if any of these things get more or less expensive, that impacts the producer and will cause them to either be able to produce more or less, in terms of supply.
Technological changes definitely impact a producer. If it's an increase in technology, that's definitely going to help them produce more at all prices. And then, finally, there's the category of government policies, things like taxes, subsidies, anything that is going to make it more expensive or less expensive for our producer will impact them.
I like to think of it this way, just in a very broad way. So anything at all that makes it easier or less expensive to produce will cause an increase in supply. So you have to think like a producer for this. OK. Is that going to be good for me or bad for me, if I'm the one producing it? You can't think of this like a buyer of the good, you have to think like the supplier. Anything that's going to make it more difficult or more expensive to produce will cause a decrease in supply.
So again, back to our change in input price, I just wanted to show you again, if the input prices go up, if they get more expensive, that's not good for the producer. So that will cause a decrease in supply. And notice, I know it looks like it's shifting up, but this is a decrease, because at all prices now, they're willing to supply a lower quantity of apples. OK. So since it made it more expensive for the farmer, he'll supply fewer apples.
If, however, he got a better deal on his fertilizer, or something else that goes into growing his apples went down in price, if it got cheaper, that would actually increase his supply. And I'll show you an increase in supply on the next slide.
So an increase in a technology is going to help us increase the supply. So if technology improves for apple growing, or apple picking, it will make farmer's definitely able to more efficiently supply their apples. They'll be able to supply a greater quantity at all prices. So you can see that we would need a new curve.
This is a shift to the right, or an increase in supply. So an increase in technology would increase our supply. If for some reason there were a failure in technology, that would decrease the supply. OK? An increase in supply will always look like this, to the right. A decrease in supply will look like the previous side, to the left. So think left versus right.
All right. So what did you learn about supply today? You learned that movement along a supply curve is just due to a change in the price of that good. Whereas a shift of the supply curve is because any other variable that impacts producers changed, like input prices, or technology, or anything at all that's going to impact their ability to produce, or their cost of production changing. Thanks so much for listening. Have a great day.
Movement caused by a change in price, assuming all other variables are held constant.
Changes other than the price of the good itself that affect production decisions for a particular good.