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How production costs affect supply

A supply curve shows how quantity supplied will change as the price rises and falls, assuming ceteris paribus so that no other economically relevant factors are changing. If other factors relevant to supply do change, then the entire supply curve will shift. Just as a shift in demand is represented by a change in the quantity demanded at every price, a shift in supply    means a change in the quantity supplied at every price.

In thinking about the factors that affect supply, remember what motivates firms: profits, which are the difference between revenues and costs. Goods and services are produced using combinations of labor, materials, and machinery, or what we call inputs    or factors of production    . If a firm faces lower costs of production, while the prices for the good or service the firm produces remain unchanged, a firm’s profits go up. When a firm’s profits increase, it is more motivated to produce output, since the more it produces the more profit it will earn. So, when costs of production fall, a firm will tend to supply a larger quantity at any given price for its output. This can be shown by the supply curve shifting to the right.

Take, for example, a messenger company that delivers packages around a city. The company may find that buying gasoline is one of its main costs. If the price of gasoline falls, then the company will find it can deliver messages more cheaply than before. Since lower costs correspond to higher profits, the messenger company may now supply more of its services at any given price. For example, given the lower gasoline prices, the company can now serve a greater area, and increase its supply.

Conversely, if a firm faces higher costs of production, then it will earn lower profits at any given selling price for its products. As a result, a higher cost of production typically causes a firm to supply a smaller quantity at any given price. In this case, the supply curve shifts to the left.

Consider the supply for cars, shown by curve S 0 in [link] . Point J indicates that if the price is $20,000, the quantity supplied will be 18 million cars. If the price rises to $22,000 per car, ceteris paribus, the quantity supplied will rise to 20 million cars, as point K on the S 0 curve shows. The same information can be shown in table form, as in [link] .

Shifts in supply: a car example

The graph shows supply curve S sub 0 as the original supply curve. Supply curve S sub 1 represents a shift based on decreased supply. Supply curve S sub 2 represents a shift based on increased supply.
Decreased supply means that at every given price, the quantity supplied is lower, so that the supply curve shifts to the left, from S 0 to S 1 . Increased supply means that at every given price, the quantity supplied is higher, so that the supply curve shifts to the right, from S 0 to S 2 .
Price and shifts in supply: a car example
Price Decrease to S 1 Original Quantity Supplied S 0 Increase to S 2
$16,000 10.5 million 12.0 million 13.2 million
$18,000 13.5 million 15.0 million 16.5 million
$20,000 16.5 million 18.0 million 19.8 million
$22,000 18.5 million 20.0 million 22.0 million
$24,000 19.5 million 21.0 million 23.1 million
$26,000 20.5 million 22.0 million 24.2 million

Now, imagine that the price of steel, an important ingredient in manufacturing cars, rises, so that producing a car has become more expensive. At any given price for selling cars, car manufacturers will react by supplying a lower quantity. This can be shown graphically as a leftward shift of supply, from S 0 to S 1 , which indicates that at any given price, the quantity supplied decreases. In this example, at a price of $20,000, the quantity supplied decreases from 18 million on the original supply curve (S 0 ) to 16.5 million on the supply curve S 1 , which is labeled as point L.

Questions & Answers

willingness and ability to buy at a market price at time specified
Joel Reply
discuss the meaning of demand in economic
Usman Reply
just try to elucidate
Aadil Reply
just try to elucidate something
Aadil
what
Ashfaq
would you explain
azad
what is elasticity, perfectly elastic, inelastic
Rue Reply
When 01 the demand is elastic
Myriam
when demand curve is horizental the curve is perfectly elastic ...when demand curve is vertical then it is perfectly inelastic
Ashfaq
elasticity means that percentage change in quantity demanded due to percentage change in price
Ashfaq
introduction to elasticity of demand
Dalhatu Reply
what is price commonly called in the labour market
AYUBA Reply
wages?
penn
Explain demand curve
Ibrahim
price in labour market is Marginal Physical Productivity...
azad
what is the price of elasticity of demand
Mahesh Reply
it is the responsiveness of a certain good. and it is calculated as follows: PED=%change in quantity demanded /%change in price
Rue
what is per capita income
Kafwimbi Reply
what is GDP of an economy
Kafwimbi
Gross Domestic Product
grace
GDP=C+I+G(X-M) C= CONSUMPTION I=INVESTMENT G=GOVERNMENT EXPENDITURES (X-M) = export - import
Sayali
What are the factors that drive exchange rates?
MacFisto
Why is scarcity the main problem of economics
Nicholas Reply
Because of unlimited needs and wants demanded by the household
Jeremiah
what is GDP deflator?
saud
Because of endless needs and wants required to achieve maximum satisfaction possible by consumers
Nobert
how to calculate price elasticity demand?
Precious Reply
change in quantity over quantity divided by change in price over price
Pele
Percentage change in quantity demanded over the percentage change in price
Nobert
if the local pizzeria raises the price of a medium pizza from Rd.60to 100 & quantity demanded falls from 700 pizzas a night to 100 pizzas at night , the price elasticity of demand for pizzas is:
Lakshmi Reply
1.2. Measurement of price Elasticity of demand
Lakshmi
0.11
Nobert
Lakshmi tell me how wrong am I coz I see you've got different answer from mine?
Nobert
_1.28
Melvis
explain how price and output are determind by a discriminating monopolist
Hiraj Reply
price and output determined through interaction between demand curve and supply curve...
Ajay
how do I view the graphs
Patricia Reply
how do I open the links
Patricia
what is the markert
Ester Reply
A market is any place where buying and selling can take place.
Landing
20. Why is a football game on ESPN a quasi-public good but a game on the NBC, CBS, or ABC is a public good?
Brigam Reply

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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