The diagram above shows that as price increases from P1 to P2 quantity supplied increases from Q1 to Q2. There has been a movement along the supply curve from A to B. A price rise will cause an expansion up the supply curve, from A to B. A fall in price from P1 to P3 will cause a fall in the quantity supplied from Q1 to Q3 (contraction from A to C). This is called a change in quantity supplied.
For example, in September 2014, oil prices fell to $99.93 since June when oil prices hit $115 (P1 to P3), due to weak China demand for oil. While this cheered motorists, it set alarm bells ringing for oil groups and Opec members, as lower prices means lower profitability, and the incentive facing oil groups is to produce less; a decrease in the quantity sublied (Q1 to Q3). Mr Hansen, head of commodity strategy at Saxo Bank, said that Opec, the cartel of oil producers, would cut output if prices started to slide towards $90 (contraction of quantity supplied of oil from A to B).
If there is a change in non-price determinant of supply, supply will increase or decrease, and the entire curve will shift to the right or to the left, as in the graph below. A shift of the supply curve, caused by a change in a determinant of supply, is called a ‘change in supply’.
In the graph below, S1 to S2 represents a decrease in supply, and S1 to S3 represents an increase in supply. The price remains unchanged at P1; the shifts in the supply curve are caused by various changes in the determinants of supply.
Nearly all the determinants of supply affect the costs of the firm and, therefore, its supply curve, which is its marginal cost curve. Put simply, if something happens that increases a firm's costs regardless of the price level (e.g. an increase in the wage rate, or an increase in government taxes), then the firm's supply curve will shift to the left (S1 to S2). If something happens that decreases a firm's costs regardless of the price level (e.g. improved technology or a subsidy from the government), then the firm's supply curve shifts to the right (S1 to S3).
Costs of factors of production (factor or resource prices) is an example of non-price determinant of market supply. The firm buys various factors of production (land, labour, capital and entrepreneurship) that it uses to produce its products. Prices of factors of production (such as wages, which are the price of labour) are important in determining the firm’s cost of production. If a factor price rises, the production cost increases, production becomes less profitable and the frim produces less (Q1 to Q2) at every price level e.g. P1; the supply curve shifts to the left (S1 to S2). Another example of a non-price determinant is the price of related goods (competitive supply). A rise in the price of apples will encourage fruit growers to move from growing pears etc. to producing apples, and thus the quantity supplied of pears will decrease (Q1 to Q2) at every price level e.g. P1, the supply curve of pears shifts to the left (S1 to S2); and consequently, the quantity supplied of apples will increase (Q1 to Q2) at every price level e.g. P1, and the supply curve of apples shifts to the right (S1 to S3).
by
abuelgasim (student)
