The Market Mechanism

Supply Factors – Shifting the Curve

A supply factor is any change in the economy which could cause the supply curve for a product to move. When you were learning about demand factors, it was easy to think about the changes that could occur based on how a consumer would respond. This time, you need to think more like a business owner.

Imagine that you were selling laptop computers, and the wholesale price (the cost that you have to pay to buy the stock) is $500 per machine. For some reason, your supplier has found that they can now offer you the computers for only $400 each. How would you respond?

If you are thinking economically, then it is likely that you would see that you can now make a bigger profit on each computer that you sell. In other words, each time you sell one machine, you will be even better off than you were previously. If this situation occurred, you might say that you are now willing to supply a higher number of laptops to the market, even though the price has not changed.

We refer to this situation as an increase in supply. The change has been modelled on the graph below. Here you will see that at any given price, the quantity supplied has increased. As a result, the supply curve has shifted to the right. (Note: every time there is an increase, the curve will shift to the right. This is true for both supply and demand.)

What would happen if the opposite occurred? Imagine that your supplier increased the cost price, and you did not feel that it was appropriate to increase the selling price. At this time, you would find that your margin on each item was lower. This might discourage you from stocking this particular model in your store. In this situation, supply has decreased: at any given price, the quantity supplied is lower.

In general terms, there are only three factors which could cause the supply curve to shift. We have just established that when the cost price of a product falls, it is likely that the supply curve will shift to the right. In fact, whenever any cost of production falls, supply will increase. The same result will be seen when workers become more efficient, or when the business gains access to more resources.

On the other hand, if costs increase, workers become less efficient or certain resources become scarcer, then it is likely that we will see a decrease in supply at this time. When this happens the supply curve will shift to the left.