The Supply Curve Shifts

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- Now that you've got the basics of the
supply curve down, we'll jump into factors

which shift the supply curve.

Here's the same list I showed
you before of important

supply shifters. Remember, the most basic
one is a change in costs. So really the

only question is, how does technological
innovations change costs? How do input

prices change costs? Taxes and subsidies,
expectations, entry or exit of producers?

Once we understand how these different
elements affect a firm's costs then we

know how the supply curve is going to
shift. By the way, I've given you a list

here but the goal is not to memorize the
list. The goal is to understand. And once

we do that then we'll be able to figure
out how any factor affects the supply

curve. Okay, let's do some examples. A
technological innovation lowers costs and

therefore increases the supply. That means
that sellers are willing to supply a

greater quantity at a given price or
equivalently they're willing to sell a

given quantity at a lower price. So let's
imagine that we have some genetically

modified seeds. What's the effect of
supply? We'll assume that the seeds for

example require less fertilizer. So let's
graph out of the effect of this innovation

would be on supply. Here's our old supply
curve with the old seeds. Now we have the

innovation. We have genetically modified
seeds which require less fertilizer and

create a reduction in cost. What does that
do to supply? It increases supply and that

means that the supply curve moves down and
to the right.

Why? Well, just read off what this means.
An increase in supply means that for any

given quantity the firm is now willing to
sell that quantity at a lower price than

before since their cost have fallen. The
minimum price that firms require in order

to sell this quantity has decreased. In
fact the minimum price that firms require

to sell any quantity has decreased.
Equivalently, at any price, now that their

cost have fallen the firms are willing to
sell more at that particular price. That's

what an increase of supply means. These
genetically modified seeds that reduced

costs and that increases supply. Let's
look at another important supply shifter,

changes in input prices, and let's do in
this case a decrease in supply. An

increase in the price of an input will
decrease supply. For example, if the

government were to increase environmental
regulations and requirements on gasoline,

that's going to cost a decrease in supply.
It doesn't mean that the government

shouldn't do that. Maybe it's worthwhile
but that will be the effect on supply.

Let's take a look. Here's our old supply
curve. Now we have increased rules and

regulations which increase costs or
there's an increase in the price of some

input that reduces supply. Reductions in
supply mean that the supply curve moves up

into the left. Again just read off what
that means. A reduction supply means that

at any price the firm is now willing to
sell a smaller quantity or equivalently it

means that for any particular quantity
where the reduction in supply with higher

costs the firm need a higher price.
Because their cost have gone up, the price

of the firm requires in order to sell any
particular quantity has increased.

Remember, this is the minimum price that
suppliers require to produce this quantity

and with higher costs that minimum price
has gone up, that's what a decrease in

supply looks like. Higher costs, decrease
supply. Let's look at a tax. A tax on

output is equivalent to an increase in
costs, and therefore a tax will decrease

the supply. Here we go. Suppose that
before the tax, firms were willing to sell

let's say 60 million barrels of oil per
day at a price of $40 per barrel. Now we

imagine there's $10 tax. How much will
firms require in order to sell 60 million

barrels of oil per day now that there is a
$10 tax? What would be the requirement for

that? $50. In fact, what a tax does is it
shifts the supply curve up by the amount

of the tax. In this case, by $10
everywhere along the supply curve. By the

way, notice we actually haven't said
anything here about what the effect of the

tax will be on prices. In fact we haven't
said anything at all about how prices are

determined. That's going to be in an
upcoming video on equilibrium. What we're

emphasizing now is how a tax or how
changes in input prices and so forth

affect the supply curve. The way we
analyze a tax is by shifting the supply

curve up by the amount of the tax. What
about a subsidy? A subsidy is just the

opposite of a tax. Instead of the
government taking with every unit that you

produce, the government gives some amount
of money for every unit which is produced.

A subsidy is equivalent to a decrease in
the firm's costs and therefore it

increases supply. Go ahead and graph the
effect on the supply curve of the subsidy

to say fast food producers. Suppose it's
aimed at helping them export overseas.

What would be the effect of a subsidy on a
supply curve for fast food producers? I'm

not actually going to show you that. If
you have any trouble graphing it, go back

and look at the tax example. A subsidy is
just a tax in reverse. Expectations. This

one is a little trickier but expectations
can also shift the supply curve. Imagine

for example the firm expect a higher price
for a good in the future, that increases

the cost of supplying the good now, the
opportunity cost. Since there's an

increase in cost, that decreases the
current supply of the good. This is

perhaps easiest to see if firms can store
the good. Suppose firms believe that the

price is going to be higher in the future,
therefore they're going to want to produce

more today. But instead of selling today,
they're going to want to store the good in

order to sell it in the future when the
price is higher. This will become more

important when we come back later and talk
about speculation. Let's see how this

works with the diagram. Here's the supply
curve currently. Now firms come to believe

that prices are going to be higher in the
future. So what do they do? They take some

of their current supply and they put that
supply into storage. They remove it from

the current market. Since that quantity is
no longer being supplied on today's

market, today's supply curve decreases.
The entry and exit of new producers is

another important supply shifter. It's
pretty easy to see that with entry, that

implies more sellers in the market that
increases supply.

Exit implies fewer sellers in the market,
decreasing supply. What will happen to the

supply of lumber with a free trade deal
with Canada? This actually happened of

course. Here's the domestic supply curve,
the U. S.supply curve without the free

trade deal. Now we get NAFDA, we get the
free trade deal and what that means is

that any price there are now more
suppliers. So there's a greater quantity

supplied at each particular price. In
addition, Canadian firms will have lower

costs in their American counterparts. Not
all of them but some of them are going to

have lower costs. That means that at any
quantity there's a lower price for the

same quantity. As entry increases supply
and for exit, the process just works in

reverse. Our final supply curve shifter
changes an opportunity cost is perhaps the

trickiest because we're usually thinking
about cost in terms of dollar costs. But

we have to keep in mind that the
fundamental concept of cost is opportunity

cost. Let's apply this and I think it will
become fairly easy to understand. Inputs

which are used in production have
opportunity costs. It can be used to

produce many different things. And sellers
will choose to employ their inputs in the

production of the highest priced final
good. For example, what happens to the

supply of soy beans when the price of
wheat increases? Here's a hint. Farmers

can use their land to grow soy beans or to
grow wheat. Farmers have a choice about

their use of land. So what happens to the
supply of soy beans when the price of

wheat increases? Let's look at this with
the graph. Here's our initial supply curve

for soy beans. It will label this low
opportunity cost, that means that the

price of wheat is low.
There's not much else useful to do with

this land other than to grow soy beans.
However, when the price of wheat goes up,

well then the opportunity cost of growing
soy beans has gone up. When the price of

wheat was low the cost of growing so beans
was low because what else were you going

to do with the land? Now that the price of
wheat has gone up, there's an alternative,

there's an opportunity. The farmers could
instead grow wheat, that means that

farmers are going to take some of their
land out of soy bean production and move

it into wheat production. So to produce
the same quantity of soy beans the farmers

are going to require a higher price
because their cost are now higher, their

alternative, their opportunity cost is
higher. How to put it differently. At the

same price of soy beans, farmers are now
going to be willing to supply fewer soy

beans because they've got other things to
do with their land such as growing wheat.

Here again is our list of important supply
shifters. These are not the only supply

shifters. There could be lots of things
which shift supply. In giving you this

list however, these are some of the most
important ones. But to understand how to

go about solving these problems, keep the
general procedure in mind. Figure out

first, what's the effect of this change on
costs? Once you know the effect of the

change on costs, you know how to shift the
supply curve. If cost decrease that's an

increase in supply. If cost increase
that's a decrease in supply. So whatever

shifter you'd get, figure out what the
effect of that is on costs and then work

out the effect on the supply curve, draw
the diagram, and you'll be fine. Thanks.

- If you want to test yourself,
click Practice Questions or if you're

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