<< Chapter < Page Chapter >> Page >

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 consumer
chill Reply
what is economics?
Odei Reply
economic development
favour Reply
what's economic activities
Mcjerry Reply
what is economic activity
please can someone differentiate between an Economist view of cost and an Accountant view of cost
What's the relationship between scarcity and choice
Beverly Reply
when your income increase your demends increase
Ali Reply
what is the d/ce between cash flow and cash transection?
purchase power is demand or decrease in quantity of products in market as shortage is demand....
urchase power is demand or decrease in quantity of products in market as shortage is demand...
When purchasing power increases with the increase income, desire to get or purchase more quantity of goods increase which can be referred as demand. where as Shortage is a state or situation in which something needed cannot be obtained in sufficient amounts
what is demand
Gabriel Reply
Demand refers to the quantities of product or service that potential buyers are willing and able to buy.
is the all your satistaction
What are the causes of Monopoly
Alex Reply
more price, less quantite
is the market which is clossed few people
Fermin and Ali Yusuf that is the causes of monopoly you people are naming or your are discussing about Demand.which one
what is national accounting
Ezichi Reply
is GDP good to measure living standard in countries
Samu Reply
When the GDP increase this will lead to high employment, high standards of living, high level of import and export, available of trade barrier
How are you doing today
Tamba Reply
what is price mechanism
Deyin Reply
In economics, a price mechanism is the manner in which the profits of goods or services affects the supply and demand of goods and services.
how can unemployment can be prevented, or the facts to reduce unemployment
Elina Reply
provision of job opportunity
is by creating job facilities
yeah how are you doing?
Am fine
More vocational and technical institutions
non motivational community
How are you doing today my dear
by providing adequate job facilities
also political stability
principle of economic
Atinga Reply
what is elasticity
Bernice Reply
A measure of the responsiveness of one variable to a change in another.
if the %± (change) in quantity demanded exceed the %± in price
type of demand
what is the different between money market and capital market

Get the best Principles of economics course in your pocket!

Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?