Figure

Hypothetical Industry Supply Curve for New Domestic Automobiles

For industry prices above $21,000, the supply curve parameter estimate (slope coefficient) shows that a $1 increase in the average price of new automobiles will increase the quantity supplied by 2,000 units.

Average price per auto ($ thousands)

Average price per auto ($ thousands)

Quantity of new automobiles (millions)

shift in supply

Movement from one supply curve to another following a change in a nonprice determinant of supply demand involves an upward shift in the demand curve, whereas a fall in demand involves a downward shift in the demand curve. Conversely, a rise in supply involves a downward shift in the supply curve; a fall in supply involves an upward shift in the supply curve.

At a price of $25,000, for example, a 2 percent rise in interest rates reduces automobile supply from 8 million units, the S8% level, to 6 million units, the S10% level. This reduction in supply reflects the fact that previously profitable production no longer generates a profit because of the increase in capital costs. At a price of $25,000, a 2 percent reduction in interest rates increases automobile supply from 8 million units, the S8% level, to 10 million units, the S6% level. Supply rises following this decline in interest rates because, given a decline in capital costs, producers find that they can profitably expand output at the $25,000 price level from 8 million to 10 million units.

A shift in supply, or a switch from one supply curve to another, indicates a change in one or more of the nonprice variables in the product supply function. In the automobile supply-function example, an increase in truck prices leads to a decrease in automobile supply, because the SUV price parameter of -400 indicates that automobile supply and truck prices are inversely related. This reflects the fact that as SUV prices rise, holding all else constant, auto manufacturers have an incentive to shift from automobile to SUV production. When automobile supply is inversely related to a factor such as SUV prices, rising SUV prices lead to falling automobile supply, and falling SUV prices lead to rising automobile supply. From the negative parameters for the price of labor, steel, energy, and interest rates, it is also possible to infer that automobile supply is inversely related to each of these factors.

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