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Shifts in Supply

Shifts in Supply

Author: Kate Eskra
Description:
This lesson covers shifts in supply.
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Tutorial

SHIFTS IN SUPPLY

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

Video Transcription

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Hi, welcome to macroeconomics. This is Kate. This tutorial is on Shifts in Supply. As always, my key terms are in red, and my examples are in green.

So in this tutorial, we'll be comparing what causes a movement along a supply curve versus what causes a shift of the supply curve. I'll explain to you that changes in price cause movement along the curve. And changes in any other factor has the ability to change the supply curve itself, which is known as a shift.

So as a reminder, the law of supply tells us that if the price of the good falls, the quantity supply falls, and it works the other way, too. There's a positive relationship between price and quantity with supply. So movement along the supply curve is movement caused by a change in price assuming that everything else is held constant, which we've defined as ceteris paribus.

So here is a supply schedule and a supply curve for a farmer's willingness to supply apples. And you can see that as the price of the apples goes up, he is willing to supply a greater quantity. And I'm saying this is in thousands of bushels. So as the price goes up, we can just move right along the curve, and as the price falls, you can see that the quantity he's willing to produce also falls with it. Again, a positive relationship between price and quantity where they move in the same direction.

So as the price is changing, we just move along the curve. We don't need a new curve. So the law of supply and ceteris paribus tells us, as we already know, as the price of apples falls, we can expect that farmers supply fewer apples. The ceteris paribus means holding everything else constant. So it's assuming that only the price of apples there has changed.

So for example, the price of their resources didn't change, so fertilizer did not get more expensive. Their technology for growing apples did not change either, just the price of apples. And that's really not the real world. That's not always how it happens. We do know that things in the world change all the time. What if fertilizer does get more expensive? Or what if they have to pay their workers more money because wages rose? What if there's some new technology that's developed for apple picking that makes it much more efficient? Will farmers really still supply the same amount of apples if these things happen? Obviously not.

But it won't be that they're just supplying a different quantity, because of a price change. It'll be something else. So if, in fact, like I said, in one or two of those examples, there was an increased cost to that farmer where he had to pay his workers more as fertilizer got more expensive, notice what might happen to his numbers. At all of these prices he's applying a lower quantity of apples.

So he's applying less, yet, it's not because the price fell, so we can't find that price quantity relationship along this curve. We can just move along this curve to find the new relationship. We need a new supply curve. There's a completely different relationship now between the price and the quantity that the farmer is able and willing to supply. So this is what we mean when we say there's been a shift of the supply curve. By the way, that's a decrease in supply. A shift to the left is a decrease, because they're willing and able to supply fewer apples at every price.

So a shift in supply is defined as changes other than the price of the good itself that are affecting production decisions for a particular good. So what are some of the categories that cause a shift in supply? Well, anything that's going to change input prices, like land labor or capital that go into producing that good. A change in technology will impact a producer.

Changes in prices of related goods. Here we'll look at them. We looked at them before when we were talking about demand in consumption, but we'll be looking at substitutes and complements in production. They're slightly different. But government policies can also impact a producer's ability to supplies of subsidies or taxes.

Really, the key idea to think about, is that anything that makes it easier or less expensive to produce something will create an increase in supply and shift the curve to the right. Anything that makes it more difficult or more expensive to produce something will cause a decrease in supply, which you already saw the shift of that supply curve to the left.

So again, here's that change in an input price. The price of apples didn't change, but if fertilizer got more expensive, it makes it more expensive for the farmer. So he will be able to supply fewer apples at all prices. That's a decrease in supply. An increase in input prices causes a decrease in supply, because it got more expensive. A decrease in an input price, like cheaper land, labor, or capital would create an increase in supply shifting the curve instead to the right.

Here's an example of an increase in supply. If technology improves for apple growing or apple picking, then that will make farmers able to more efficiently supply apples. They'll be able to supply a greater quantity at all prices. So here, an increase in technology would create a shift to the right or an increase in supply. Or, if we had an example of a failure of technology or something, that could certainly decrease the supply.

OK, now we come to this idea of substitutes. And your key term defines this as production and consumption. Really, this definition is focusing on substitutes more so than consumption, but I'll tell you how it works for production. Remember a substitute is something that if we're talking about consumption, you buy instead of one another. But here with production it's going to be a little bit different.

So if the market price of apples goes up, let's continue with our apple example for a minute, we know that the law of supply tells us the quantity supplied for apples would increase. And we can just show that right along moving along the curve. But let's talk about a substitute in production.

Maybe pear growing an apple growing are kind of substitutable for one another. If apples are more expensive in price, maybe some pear farmers are going to look at that and say, hmm, I could actually make more money as an apple farmer. So maybe they decide to plant apples instead of pears. That's what we can see as a substitute in production.

So the supply of pears would actually shift, because farmers are planting fewer pears when the price didn't change for pears. OK, so they're planting fewer pears. And so the supply of the pear curve would shift to the left and be a decrease, because the price of apples went up.

So for substitutes in production, when the price of a substitute in production increases, like the apples going up in price, the supply of the other good will actually decrease. And the supply we were talking about there was for pears.

Complements are things that go together. OK, so again, this definition focuses a little bit more on the consumption end of it, but in production, it'll be a little bit different. Complement goods, so when we're talking about production, let's use the example of farmers again. Many farmers produce two products, because one is a byproduct of the others. So wheat and hay are an example, or beef and leather. So those would be complements in production.

If the price of wheat goes up, we know, again, according to the law of supply that that would cause a change in quantity supplied for wheat or movement along the wheat curve. They would produce more wheat, but only because the price went up. Now that they're producing more wheat, they'll also be producing more hay. Hay didn't go up in price, yet, they're supplying more at all prices. So this would be a change in supply of hay. Or a shift of the supply curve for hay to the right.

So for complements in production, when the price of a complement in production increases, the supply of the other good actually will increase. OK, so what's the bottom line here? Is it quantity supplied, or is it a change in supply?

Well, the way to think of it, the long and short of it is, a change in the price of a good will cause a change in quantity supplied or cause movement along the curve, just as it did with demand. A change in any other factor, the ones that we talked about today could potentially shift the supply curve. And that's when we can say there's been a change in supply, an increase or decrease in supply. It's important to keep in mind that different situations will shift the curve more than others will.

So in this tutorial, we talked about how movement along a supply curve is due to a change in the price of that good. Versus a shift of the supply curve is because of the change in any other variable, like a change in input prices, technology, the prices of substitutes or complements in production, or anything else that could potentially impact their ability to produce or their cost of production

Thanks so much for listening. Have a great day.

Notes on "Shifts in Supply"

Terms to Know

Law of Supply

If the price of a good decreases, the quantity supplied decreases.

Substitutes (production and consumption)

As the price one good increases, the demand for an alternative good meeting the same producer or consumer need, increases.

Complements (production and consumption)

A good for which the demand increases as the price of an associated good decreases.

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.