Figure

A change in any nonprice determinant of supply causes the entire supply curve to shift. A decrease in labor costs, for example, causes the supply of maple syrup to shift from S, to S2. At each price, more bottles are supplied after the shift.

Now let's take a look at the different variables that can cause a change in supply and shift the supply curve.

To avoid confusion, always apply the same language convention for supply that we discussed earlier for demand. When we move along the supply curve, we call it a change in quantity supplied. A change in quantity supplied is always caused by a change in the good's price. When the entire

Prices of Inputs. Producers of maple syrup use a variety by a change in something other than the good's price.

supply curve shifts, we call it a change in supply. A change in supply is caused of inputs: land, maple trees, evaporators, sap pans, labor, glass bottles, bottling machinery, transportation, and more. A higher price for any of these means a higher cost of producing and selling maple syrup, making it less profitable. As a result, we would expect producers to shift some resources out of maple syrup production, causing a decrease in supply. In general, a rise in the price of an input causes a decrease in supply, shifting the supply curve to the left. A fall in the price of an input causes an increase in supply, shifting the supply curve to the right.

Figure 5 has already illustrated one example of this: The supply curve shifted right-ward when the wage rate paid to maple syrup workers fell. Now we can see that maple syrup workers are just one type of input among many for syrup producers. If the price of bottles, transportation, or any other input were to decrease, it would also shift the supply curve for maple syrup rightward, just as in Figure 5.

Profitability of Alternate Goods. Many firms can switch their production rather easily among several different goods or services, all of which require more or less the same inputs. For example, a dermatology practice can rather easily switch its specialty from acne treatments for the young to wrinkle treatments for the elderly. An automobile producer can—without too much adjustment—switch to producing light trucks. And a maple syrup producer could dry its maple syrup and produce maple sugar instead. Or it could even cut down its maple trees and sell maple wood as lumber. These other goods that firms could produce are called alternate goods.

When an alternate good becomes more profitable to produce—because its price rises, or the cost of producing it falls—the supply curve for the good in question will shift leftward.

In our example, if the price of maple sugar rises, and nothing else changes, maple sugar will become more profitable. Producers will devote more of their output to maple sugar, decreasing the supply of maple syrup.

Technology. A technological advance in production occurs whenever a firm can produce a given level of output in a new and cheaper way than before. For example, the discovery of a surgical procedure called Lasik—in which a laser is used to reshape the interior of the cornea rather than the outer surface—has enabled eye surgeons to correct their patients' vision with fewer follow-up visits and smaller quantities of medication. Similarly, in the late 1990s, several firms—including Ebay, Amazon.com, and Priceline.com—developed new software that enabled people and firms to trade used goods more cheaply over the Internet (compared to

Alternate goods Other goods that a firm could produce, using some of the same types of inputs as the good in question.

the previous method of running and searching through classified ads). These examples are technological advances because they enable firms to produce the same output (eye surgeries, used goods sales) more cheaply than before.

In maple syrup production, a technological advance might be a new, more efficient tap that draws more maple syrup from each tree, or a new bottling method that reduces spillage. Advances like this would reduce the cost of producing maple syrup, and producers would want to make and sell more of it at any price.

In general, cost-saving technological advances increase the supply of a good, shifting the supply curve to the right.

Productive Capacity. A market's productive capacity is determined by the number of producers in the market, and the plant and equipment possessed by each firm. Whenever productive capacity increases, the supply curve shifts rightward, since sellers would choose to sell a greater total quantity at each price. Similarly, a decrease in productive capacity will shift the supply curve leftward. For example, if a sudden blight destroyed maple trees in Vermont, the total productive capacity of maple syrup suppliers would shrink, decreasing the supply of maple syrup to any market. On the other hand, if—over time—more firms moved into the market and started their own maple syrup farms, supply would increase.

Changes in weather can cause sudden changes in productive capacity in many agricultural markets. Good weather increases the productive capacity of all farms in a region, shifting supply curves for their crops to the right. Bad weather destroys crops and decreases productive capacity, shifting supply curves to the left. Natural disasters such as fires, hurricanes, and earthquakes can destroy the productive capacity of all industries in a region, thereby causing sudden, dramatic leftward shifts in supply curves.

An increase in sellers' productive capacity—caused by, say, good weather or an increase in the number of firms—shifts the supply curve rightward. A decrease in sellers' productive capacity shifts the supply curve leftward.

Expectations of Future Prices. Imagine that you are the president of Sticky's Maple Syrup, Inc., and your research staff has just determined that the price of maple syrup will soon rise dramatically. What would you do? You should postpone producing—or at least selling—your output until later, when the price will be higher and profits will be greater. Applying this logic more generally,

A rise in the expected price of a good will decrease supply, shifting the supply curve leftward.

The list of variables that shift the supply curve in Figure 6 does not include the amount that buyers want to buy. Is this a mistake? Doesn't demand affect supply?

The answer is no—at least, not directly. The supply curve tells us how much sellers would choose to sell at alternative prices. It provides answers to a series of hypothetical questions, such as How much maple syrup would firms choose to sell if the price were $4.00 per bottle? If the price were $3.50 per bottle? and so on. Buyers' decisions don't affect the answers to these questions, so they cannot shift the supply curve.

CHANGES IN SUPPLY AND IN QUANTITY SUPPLIED

FIGURE 6

Price

Price

Quantity

Price

Entire supply curve shifts rightward when:

• profitability of alternate good!

• productive capacity i

Entire supply curve shifts rightward when:

• profitability of alternate good!

• productive capacity i

Price

Quantity

Entire supply curve shifts leftward when:

• profitability of alternate good!

• productive capacity I

• expected price t

Entire supply curve shifts leftward when:

• profitability of alternate good!

• productive capacity I

• expected price t

Quantity

Figure 6 summarizes the different variables that change the supply of a good and shift the supply curve.

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