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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 are the important of economic to accounting students with references
salihu Reply
Economics is important because it helps people understand how a variety of factors work with and against each other to control how resources such as labor and capital get used, and how inflation, supply, demand, interest rates and other factors determine how much you pay for goods and services.
Muhammad
explain the steps taken by the government in developing rural market?
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contribution of Adam smith in economics
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Effah Reply
Pls, I need more explanation on price Elasticity of Supply
Isaac Reply
Is the degree to the degree of responsiveness of a change in quantity supplied of goods to a change in price
Afran
Discuss the short-term and long-term balance positions of the firm in the monopoly market?
Rabindranath Reply
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Mitiku
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Rabindranath
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what is firms
Anteyi Reply
A firm is a business entity which engages in the production of goods and aimed at making profit.
Avuwada
What is autarky in Economics.
Avuwada
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Tia Reply
So how is the perfect competition different from others
Rev Reply
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Tia
please what type of commodity is 1.Beaf 2.Suagr 3.Bread
Alfred Reply
1
Naziru
what is the difference between short run and long run?
Ukpen Reply
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Docky
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Anna
The short run is a period of time in which the quantity of at least one inputs is fixed...
Anna
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Anna
Elacisity
salihu
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Suraj Reply
It will creates rooms for an effective demands.
Chinedum Reply
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babsnof
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eshita
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Suraj
Economics is a science which study human behavior as a relationship between ends and scarce means which has an alternative use.
Mr
what is supply
babsnof
what is different between demand and supply
Debless Reply
Demand refers to the quantity of products that consumers are willing to purchase at various prices per time while Supply has to do with the quantity of products suppliers are willing to supply at various prices per time. find the difference in between
Saye
Please what are the effects of rationing Effect of black market Effects of hoarding
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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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