Factors that Affect Supply

Unit 5.3

Changes in Quantity Supplied

• A Change in Price will change Quantity Supplied

1 5

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

S

1.00A

C$3.00

A rise in the price of ice cream cones results in a movement

along the supply curve.

Changes in Supply

• Changes in the price of a good can move the point of how much businesses will supply goods. Other changes that affect supply will instead move the whole curve.– Input Costs– Labor Productivity– Technology– Government

• Taxes• Regulation

– Number of Producers

Price ofIce-Cream

Cone

Quantity ofIce-Cream Cones

0

Increasein supply

Decreasein supply

Supply curve, S3

curve, Supply

S1Supply

curve, S2

Input Costs• The most immediate changes in supply can occur due to

changes in the costs of inputs to the business.– Paying employees– Raw Materials Costs– Taxes– Rent

• When costs go up, the supply curve moves to the left (almost always). When costs go down, the curve moves to the right (sometimes.)

• When costs go down, you should not assume that the curve will move to the right, unless pressures are brought to bear on the company, such as competition.

Government Influence - Subsidies• Subsides are government monies used to prop up or lower prices for a

good by either having suppliers hold back on production, or to lower costs to make it more available.

• Examples – The United States grows too much wheat. If all the wheat growers were to put their goods on the market, the supply would be so large that prices would drop considerably. Because of the drop in prices, the average farmer would not be able to sell enough wheat to support their costs. By paying farmers NOT to grow wheat, the supply of wheat is made more scarce, thus raising the prices, and allowing farmers to make enough profits to keep producing wheat.

• Or the government can directly give money to a company to lower the costs of a good, thus increasing supply, and making that good available to more people and businesses that use that good. U.S. Steel industries have used subsidies like this to produce cheap steel that can be used by other companies to produce goods more cheaply, thus increasing the supply of secondary goods like automobiles.

• Subsidies can also be used to protect an industry from competition abroad, in order to insure that the business remains local in case of a crisis, or to build that industry up to the point where it can compete in the global market.

Regulations

• Regulations in business usually add to costs, making it more expensive to produce. This in turn reduces supply. Most regulations are considered a good trade off though, as it makes the goods safer. In times of crisis or recession, regulations can be relaxed to increase supply.

Excise Taxes

• The government can directly tax a good, to reduce consumption. This tax takes place after the good is produced, and is usually paid directly by the consumer. Products like liquor and tobacco have excise taxes on them.