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Changes in Supply and Movements Along Supply Curve

Changes in Supply and Movements Along Supply Curve

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Author: Sophia Tutorial
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Identify shifts and movements along the supply curve based on a given scenario.

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Tutorial
what's covered
This tutorial will compare what causes movement along a supply curve versus what causes a shift of the supply curve itself.

Our discussion breaks down as follows:

  1. Movement Along a Supply Curve
  2. Ceteris Paribus
  3. Shifts in Supply
  4. Causes of Shifts in Supply
    1. Changes in Input Prices
    2. Changes in Technology
    3. Government Policies


1. Movement Along a Supply Curve

Movements along a supply curve is movement caused by a change in price, assuming all other variables are held constant.

Since we are discussing supply, let's look at the supply schedule of a producer--in this case, a farmer who is supplying apples to the market.

Notice the relationship between price and the quantity, in thousands of bushels, that he is willing to supply.

Price of Granny Smith Apples Quantity of Granny Smith Apples Each Week
$2.00 7
$1.75 6
$1.50 5
$1.25 4
$1.00 3
$0.75 2
$0.50 1
$0.25 0

Notice that if the price per apple was $2, which is quite an expensive apple, the farmer is willing to produce a large quantity because he knows that he can make a lot of money.

However, as the price starts to fall, he is willing to supply a lower and lower quantity of apples.

Let's look at the supply graph, if we plot these points with price on the y-axis and the quantity of apples that he is willing to supply to the market on the x-axis.

Notice the positive relationship between price and quantity. As the price rises, the farmer is willing to supply more. As price falls, the farmer is willing to supply less. In fact, he is not willing to supply any apples at all when the price is $0.25 per apple.

big idea
This is the law of supply: as the price falls, the quantity supplied falls, and vice versa, meaning as price rises, the quantity supplied rises. That is what is meant by movement along the curve. As prices change, the producer is willing to supply a different quantity, so we simply move along the curve from one point to the next.

term to know
Movement Along Supply Curve
Movement caused by a change in price, assuming all other variables are held constant


2. Ceteris Paribus

This movement along a supply curve assumes a concept known as ceteris paribus, which means holding all other variables constant.

So, as the price of Granny Smith apples falls, we can expect that farmers will supply fewer of them.

Ceteris paribus assumes that only the price of apples has changed. The price of their resources or inputs, such as fertilizer or technology, did not change.

Just the price of apples changed, and this is what impacted him to supply fewer apples. As the price is changing, we are moving along the curve, assuming that nothing else changed.


3. Shifts in Supply

However, in the real world, we know many variables are constantly changing. What if the farmer's fertilizer does get more expensive, or what if he has to pay his workers more money because wages went up? What if a positive change occurs, and a new technology is developed that makes apple picking much more efficient?

In this case, we can't simply move along the curve, because farmers may not still supply the same amount of apples if any of these situations occur.

Let's use the example of an increased cost to the farmer, such as an increase in the cost of fertilizer.

Notice what happens to his numbers. At all of these prices--the same prices as before--he is supplying a lower quantity of apples. He is not even willing to supply any apples at $0.50 or $0.75, and only willing to supply one at $1, instead of the three before.

Price of Granny Smith Apples Quantity of Granny Smith Apples Each Week
$2.00 5
$1.75 4
$1.50 3
$1.25 2
$1.00 1
$0.75 0
$0.50 0
$0.25 0

If we charted these numbers, we can't simply move along the supply curve, because that relationship doesn't exist between price and quantity anymore.

There is a new relationship now between price and quantity, which requires a new supply curve.

This represents a shift in supply, which is defined as changes other than the price of the good itself that affect production decisions for a particular good.

term to know
Shift in Supply
Changes other than the price of the good itself that affect production decisions for a particular good


4. Causes of Shifts in Supply

Here is a summary of the factors that can impact producers and cause a shift in supply; we will discuss each of them in further detail.

File:9232-Screen_Shot_2019-04-21_at_10.11.06_PM.png

hint
Keep in mind that anything that makes it easier or less expensive to produce something will create an increase in supply. Anything that makes it more difficult or more expensive to produce something will cause a decrease in supply.

4a. Changes in Input Prices
If input prices go up, this negatively impacts the producer and will cause a decrease of supply, as shown in this supply graph.

The price of apples didn't change, but if fertilizer got more expensive, it makes it more expensive for the farmer. Therefore, he will supply a lower quantity of apples at all prices, which represents a decrease in supply.

If, however, he got a better deal on his fertilizer, or if there was a decrease in another input price, like cheaper land, labor, or capital, it would create an increase in supply, shifting the curve to the right instead.

4b. Changes in Technology
Now, an increase in technology will help to increase supply. If technology improves for apple growing or apple picking, then farmers will be able to more efficiently supply apples. They will supply a greater quantity at all prices.

Therefore, an increase in technology would create a shift to the right or an increase in supply, shown below. Conversely, a failure of technology could certainly decrease the supply.

hint
An increase in supply will always look like a shift to the right, while a decrease in supply will always look like a shift to the left.

4c. Government Policies
Briefly, government policies, such as subsidies and taxes, or anything that will make it more or less expensive for a producer, can also impact a their ability to supply.


summary
Today we learned that movement along a supply curve is due to a change in the price of that good, assuming ceteris paribus, or holding all other variables constant. On the other hand, we learned that shifts in supply, or a shift of the supply curve, occurs when any other variable that impacts producers changes, like changes in input prices, or changes in technology, or government policies, meaning anything that will impact their ability to produce or cost of production.

Source: Adapted from Sophia instructor Kate Eskra.

Terms to Know
Movement Along Supply Curve

Movement caused by a change in price, assuming all other variables are held constant.

Shift in Supply

Changes other than the price of the good itself that affect production decisions for a particular good.