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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

what is economic
Azolingo Reply
why is economics not a pure science?
AHUMBE Reply
what is management of human resources?
Ibrahim Reply
how is economics a science?
Mei Reply
4. It is a hot day, and Bert is thirsty. Here is the value he places on each bottle of water: Value of first bottle $7 Value of second bottle $5 Value of third bottle $3 Value of fourth bottle $1 a. From this information, derive Bert’s demand schedule. Graph his demand curve for bottled w
Tahmina Reply
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Lukman
what is the law of diminishing marginal utility
Samuel Reply
The law of diminishing marginal utility state that as a consumer consumes a successive units of a commodity, a point is eventually reached where consumption of additional unit yields less satisfaction.
raheem
what is demand
Isatu Reply
other things can be equal an certain amount paid for the goods by consumer in the market called demand.
Dhanishhwar
demand is the amount of a commodity a consumer is willing and able buy at a given price at a particular point in time
Samuel
Demand is the quantity of commodity a consumer is willing and able to buy at a given price and a particular time.
raheem
what is economics
Owusu Reply
economics is a social science subject, which study human behaviors as a relationship btw end ND scarce means
Joseph
what utility
Isatu
Utility is the satisfaction a consumer derives from consuming a particular commodity.
raheem
meaning of economics
Agyei Reply
what is a columnist
Owusu
what are the four basic assumptions of perfect competition
Liyanda Reply
There is a well known maximum by economic that states that the birthd of money is the deaths of batter system discuss the statement
PHILIP Reply
how does price elasticity increase
Anuoluwapo Reply
What is real GDP
Klaudia Reply
Real GDP is a way of adjusting our output calculations for inflation so that we can see group interms of physical production quantity
Minalu
Real gross domestic product is a macroeconomic measure of the value of economic output adjusted for price changes. This adjustment transforms the money-value measure, nominal GDP, into an index for quantity of total output
amisha
what is economics
Preet Reply
Economics is the study of human behavior between scarcity and want.
Vincent
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Tendai
economics is the study of man and his behaviors
toheeb
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Paul
ECONOMICS IS THE STUDY OF,HOW HUMAN BEINGS MADE DECISIONS IN THE TIME OF SCARCITY.
Bakshi
According to Professor Lionel Robbins" Economics is a science which study human behaviour as a relationship between ends and scarce means which have alternative uses".
Paul
According to Adam Smith, "Economics is a science which inquired into the nature and cause of wealth of nations. "
Tannu
economics is a science that studies human behaviour as a relationship between ends and scarce means which have alternative uses
Efua
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Ruth
More questions
Paul
What is utility
Isatu
what is the relationship between savings, consumption and investment
Samuel
according to dr.adam Smith," an enquire in to the nature and causes of the wealth of the nation. "1776.Economics is the studies of the wealth of the nation.
Dhanishhwar
what is elasticity
RELEBOHILE Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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