Shift of the Supply Curve
The Law of Supply states that price and quantity supplied tend to move in the same direction. In the real world, factors other than price affect the supply of goods and services that producers will provide to the marketplace. The Law of Supply still holds true, but on a new supply curve.
When a factor other than price affects the quantity supplied, it is called a change in supply, and that change is reflected in a shift of the supply curve. Producers supply a greater or lesser amount of a given product at the same price, and the supply curve shifts left or right to reflect the change.
The next screen shows examples of factors that can affect the supply of a good or service.
Move the slider to change supply. Watch how it affects the relationship between price and quantity supplied.
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Why Supply Curves Shift?
There are many factors other than price that affect the supply of a good or service and cause a shift in the supply curve for a product.
View these examples of factors that can shift supply.
The Cost of Inputs: The prices of raw materials and labor needed to produce a good or service affect the supply. If the prices of these inputs rise, the supply will decrease. If they fall, the supply will increase.
Examine the effect that each of the following have on the supply of milk in the market.
A new machine makes baling hay for winter cattle feed less expensive, allowing farmers to keep and feed more dairy cattle.
Wisconsin experiences a summer-long drought and dairy production for the entire country falls as a result.
An increase in electric rates makes it more expensive for dairy farmers to operate their milking machines.
A new company opens dairy processing
facilities to compete with existing
companies.
Did You Get It?
What remains constant if there is movement on a
supply curve?
If the supply curve shifts?
Supply of Milk
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Movement Along the Supply Curve
The Law of Supply states that producers will supply a greater quantity of a good or service at higher prices, and a lower quantity at lower prices. The supply curve for a good or service therefore almost always rises from left to right and is upward sloping.
Economists use the Latin term ceteris paribus, meaning “all else equal,” to indicate that they are only considering a change in one variable. The Law of Supply only considers how quantity supplied responds to a change in price. A change in quantity supplied in response to a change in price is referred to as a movement along the supply curve.
The next screen shows examples of how quantity supplied changes with price, all else being equal.
Move the slider to change price. Watch how it affects the quantity supplied.
Supply
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Examine the effect of each change in price on the quantity of milk that is supplied.
Competing cheese manufacturers are increasingly willing to pay more for milk to ensure their supply of raw materials, increasing the price of milk.
Congress enacts a price ceiling to lower and limit the price of milk across the country in order to improve early childhood nutrition.
Wholesale buyers for large grocery chains are able to negotiate lower milk prices, which drives down market prices for milk.
After a new medical study recommends drinking more milk, shoppers are willing to pay more for milk.
Did You Get It?
The quantity supplied changes in the
direction when there is a change
in price.
Supply of Milk
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Wrap Up
If the quantity firms are willing to supply changes at every price, there is a shift of the supply curve.
For more information on shifts of the supply curve, read Chapter 5, Module 14 of Explorations in Economics and study the Module 14 Review and Assessment. You can also test yourself with the Module 14 online quiz here on the BCS.