The supply curve isolates the relation between the price of a good and the quantity supplied, other things constant. Assumed constant along a supply curve are the determinants of supply other than the price of the good, including (1) the state of technology, (2) the prices of resources, (3) the prices of other goods, (4) producer expectations, and (5) the number of producers in the market. Let’s see how a change in each affects the supply curve.
Changes in Technology
Along a given supply curve, technology is assumed to remain unchanged. If a better technology is discovered, production costs will fall; so suppliers will be more willing and able to supply the good at each price. For example, new techniques helped Marathon Oil cut drilling time for a new well from 56 days in 2006 to only 24 days in 2009.2 Consequently, supply will increase, as reflected by a rightward shift of the supply curve. For example, suppose a new, high-tech oven that costs the same as existing ovens bakes pizza in half the time. Such a breakthrough would shift the market supply curve rightward, as from S to S9 in Exhibit 4, where more is supplied at each possible price. For example, at a price of $12, the amount supplied increases from 24 million to 28 million pizzas, as shown in Exhibit 4 by the movement from point g to point h. In short, an increase in supply that is, a rightward shift of the supply curve means that producers are willing and able to sell more pizza at each price.
Along a given supply curve, technology is assumed to remain unchanged. If a better technology is discovered, production costs will fall; so suppliers will be more willing and able to supply the good at each price. For example, new techniques helped Marathon Oil cut drilling time for a new well from 56 days in 2006 to only 24 days in 2009.2 Consequently, supply will increase, as reflected by a rightward shift of the supply curve. For example, suppose a new, high-tech oven that costs the same as existing ovens bakes pizza in half the time. Such a breakthrough would shift the market supply curve rightward, as from S to S9 in Exhibit 4, where more is supplied at each possible price. For example, at a price of $12, the amount supplied increases from 24 million to 28 million pizzas, as shown in Exhibit 4 by the movement from point g to point h. In short, an increase in supply that is, a rightward shift of the supply curve means that producers are willing and able to sell more pizza at each price.
Changes in the Prices of Resources
The prices of resources employed to make the good affect the cost of production and therefore the supply of the good. For example, suppose the price of mozzarella cheese falls. This reduces the cost of making pizza, so producers are more willing and better able to supply it. The supply curve for pizza shifts rightward, as shown in Exhibit 4. On the other hand, an increase in the price of a resource reduces supply, meaning a shift of the supply curve leftward. For example, a higher price of mozzarella increases the cost of making pizza. Higher production costs decrease supply, as reflected by a leftward shift of the supply curve.
The prices of resources employed to make the good affect the cost of production and therefore the supply of the good. For example, suppose the price of mozzarella cheese falls. This reduces the cost of making pizza, so producers are more willing and better able to supply it. The supply curve for pizza shifts rightward, as shown in Exhibit 4. On the other hand, an increase in the price of a resource reduces supply, meaning a shift of the supply curve leftward. For example, a higher price of mozzarella increases the cost of making pizza. Higher production costs decrease supply, as reflected by a leftward shift of the supply curve.
Changes in the Prices of Other Goods
Nearly all resources have alternative uses. The labor, building, machinery, ingredients, and knowledge needed to run a pizza business could produce other goods instead.
Nearly all resources have alternative uses. The labor, building, machinery, ingredients, and knowledge needed to run a pizza business could produce other goods instead.
A drop in the price of one of these other goods, with the price of pizza unchanged, makes pizza production more attractive. For example, if the price of Italian bread declines, some bread makers become pizza makers so the supply of pizza increases, shifting the supply curve of pizza rightward as in Exhibit 4. On the other hand, if the price of Italian bread increases, supplying pizza becomes relatively less attractive compared to supplying Italian bread. The opportunity cost of supplying pizza increases. As resources shift from pizza to bread, the supply of pizza decreases, or shifts to the left.
Changes in Producer Expectations
Changes in producer expectations can shift the supply curve. For example, a pizza maker expecting higher pizza prices in the future may expand his or her pizzeria now, thereby shifting the supply of pizza rightward. When a good can be easily stored (crude oil, for example, can be left in the ground), expecting higher prices in the future might prompt some producers to reduce their current supply while awaiting the higher price. Thus, an expectation of higher prices in the future could either increase or decrease current supply, depending on the good. More generally, any change affecting future profitability, such as a change in business taxes, could shift the supply curve now.
Changes in producer expectations can shift the supply curve. For example, a pizza maker expecting higher pizza prices in the future may expand his or her pizzeria now, thereby shifting the supply of pizza rightward. When a good can be easily stored (crude oil, for example, can be left in the ground), expecting higher prices in the future might prompt some producers to reduce their current supply while awaiting the higher price. Thus, an expectation of higher prices in the future could either increase or decrease current supply, depending on the good. More generally, any change affecting future profitability, such as a change in business taxes, could shift the supply curve now.
Changes in the Number of Producers
Because market supply sums the amounts supplied at each price by all producers, market supply depends on the number of producers in the market. If that number increasessupply will increase, shifting supply to the right. If the number of producers decreases, supply will decrease, shifting supply to the left. As an example of increased supply, the number of gourmet coffee bars has more than quadrupled in the United States since 1990 (think Starbucks), shifting the supply curve of gourmet coffee to the right. Finally, note again the distinction between a movement along a supply curve and a shift of a supply curve. A change in price, other things constant, causes a movement along a supply curve, changing the quantity supplied. A change in one of the determinants of supply other than price causes a shift of a supply curve, changing supply. You are now ready to bring demand and supply together.
Because market supply sums the amounts supplied at each price by all producers, market supply depends on the number of producers in the market. If that number increasessupply will increase, shifting supply to the right. If the number of producers decreases, supply will decrease, shifting supply to the left. As an example of increased supply, the number of gourmet coffee bars has more than quadrupled in the United States since 1990 (think Starbucks), shifting the supply curve of gourmet coffee to the right. Finally, note again the distinction between a movement along a supply curve and a shift of a supply curve. A change in price, other things constant, causes a movement along a supply curve, changing the quantity supplied. A change in one of the determinants of supply other than price causes a shift of a supply curve, changing supply. You are now ready to bring demand and supply together.
.
0 comments:
Post a Comment