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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

1. Interdepwndence 2. advertising, 3. group behaviour 4. Competition 5. barriers to entry of firm 6. lack of uniformity 7. Existence of price rigidity 8. No unique pattern of pricing behaviour 9. Indeterminatensess of demand curve
Shashan Reply
characteristics of oligopoly
BONIPHACE Reply
please explain to me about the curves
girlie Reply
they diagrams used to illustrate relationship between variables in economics
Ayuuba
how
aliyu
I am pretty good what about you
Ayuuba
the graphical representation of mathematical equation called curve
Peer
yeah !
Hadya
mention not hadya
Peer
ok i understand
Chris
it is planned of action
Mustafe Reply
What is demand curve
ajeet Reply
demand curve is a diagrametical presentation of quantity of commodity which consumer willing to able to purchase at a various price in a given market and time.
Sumit
wealfer, wealth,scarcity and Groth wech one more suit in economics
Keji Reply
wealth
Mumin
the theme of economics
Rebecca Reply
when income elasticity of demand for agood is positive and less than one thegood is
madina Reply
A consumer with a given income will maximise their utility when the...
Paul Reply
when the price that he actually pays is less than the price he was willing to pay for it
Jamaala
can you send me demand curve diagram with explanation ?
Zorrex Reply
used and limitations of microeconomics
Altaf Reply
explain the relation between short run average cost and short run marginal costs
VICKY Reply
explain the relation between short run average cost and short run marginal cost
VICKY
explain the relation between short run average cost and short run marginal cost
VICKY
explain the relation between short run average cost and short run marginal cost
VICKY
wealfer, wealth,scarcity and Groth wech one more suit in economics?
Keji
briefly state the reasons for downwards sloping demand curve ?
The Reply
taste and preference
Fabian
if John was given $10, he would spend none of it on tuna fish.But when asked, he claims to be indifferent between receiving $10 worth of tuna and a $ 10 bill.How could this be?
oliva Reply
Autonomous free demand
sadiq
What is illustrates?
Anik 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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