Explain why sellers can offer more or less at the same price.
A supply determinant changes what producers are willing and able to sell at a given own price. Input costs, productivity and technology, production taxes or subsidies, the number of sellers and productive capacity, natural conditions and some expectations affect supply. Related products can matter when producers share resources or produce goods together. Identify the mechanism: costs, capacity, availability or the choice of what and when to sell. The good's own price changing is instead a movement along supply. A supply increase means more is offered at each price; it need not mean every individual firm has lower costs.
- Inputs and costs
- Inputs are resources used to produce goods, such as flour, workers' time and electricity in a bakery. If producing each extra loaf costs more while its selling price is unchanged, fewer loaves may be worthwhile to supply.
- Productivity
- Productivity means output from a given amount of inputs. Equipment that makes more loaves with the same resources can lower cost per loaf and increase supply at each bread price.
- Availability and capacity
- More sellers, usable equipment or stored goods can increase what is offered at each price. Poor weather can reduce available farm output. The cause of a supply change need not be lower costs for every existing seller.
Supply determinants and their mechanisms
Input prices
Higher wages, raw-material prices or energy prices can raise production costs and shift supply left. Explain why the input is used in this market; a wage change is a demand or supply outcome in a separate labour market.
Productivity and technology
Producing more with the same inputs, or using fewer inputs per unit, can lower costs and shift supply right. A technology announcement alone does not establish that firms have adopted it or that costs have fallen.
Production taxes and subsidies
A per-unit production tax is a charge on each unit supplied: a higher charge raises its cost and shifts supply left. A per-unit production subsidy is government support paid for each unit: it lowers the producer's cost after the payment and shifts supply right. Detailed intervention outcomes belong in the intervention chapter.
Sellers and productive capacity
A new seller adds quantities to market supply; a seller leaving removes them. More usable machinery or premises may expand what can be offered at each price. Existing sellers' costs do not have to fall for a new seller to enter.
Natural conditions and disruption
Weather, disease or transport disruption can alter available output or costs. A poor harvest reduces the amount offered at a given price; recovered transport links may increase it.
Expectations and stocks
Stocks are goods held for later sale. If sellers expect a storable good to fetch more later, they may hold it back and reduce current supply. This depends on storage, cash needs and whether the good will spoil. Expectations could also encourage future capacity, so distinguish current from future supply.
Alternative uses of resources
If a farm can use the same land for carrots or onions, a higher onion price can encourage it to switch land away from carrots. Carrot supply then falls at each carrot price. This is competitive supply, not a claim that consumers regard the goods as substitutes.
Joint production
If producing more of one good necessarily yields more of another, an increase in production of the first may increase supply of the second. For example, more timber processing can make more sawdust available. Explain the production link; consumer complementarity is a different relationship.
Worked example: Electricity and equipment in a bakery market
Consider a town's weekly market for identical bread loaves. Electricity becomes more expensive for bakeries. Later, some bakeries install equipment that uses less electricity per loaf. Demand is unchanged.
- A higher electricity price raises an input cost. At any given bread price, fewer loaves are worthwhile to produce, so market supply shifts left from S0 to S1.
- At the old bread price there is a shortage. With flexible prices, bread price rises, quantity demanded contracts along the unchanged demand curve, and quantity supplied extends along S1 until a new equilibrium is reached. Price is higher and quantity lower than initially.
- Equipment that reduces electricity use per loaf lowers unit production costs relative to the post-cost-rise position. This shifts supply right from S1; it does not shift demand.
- Whether supply returns to S0, remains to its left or moves beyond it depends on how much costs fall and how widely the equipment is adopted. A second event in the opposite direction does not automatically cancel the first.
Watch out for this
More firms enter, so every existing firm's costs must have fallen.
Entry adds sellers' quantities to market supply even if incumbent firms' costs are unchanged. Explain a market supply shift through the number of sellers when that is the evidence given.
Check your understanding
A new seller enters a market and offers 200 units per month at the current price. Existing sellers' schedules and demand are unchanged. Which statement is justified?
- Market demand shifts right because there is a new business.
- The old market supply curve is unchanged; there is only movement along it.
- Market quantity supplied at that price rises by 200; market supply increases.