Determinants of Supply
What is Determinants of Supply?
Determinants of supply are factors that shift the supply curve, changing the quantity supplied at each price.
The main determinants of supply are technology, input costs, government policies, and expectations. When these factors change, the supply curve shifts to the right or left. For example, if a new technology makes production more efficient, supply will shift to the right, indicating an increase in supply at each price level.
Determinants of Supply: a worked example
A bakery's supply curve is Qs = 6P minus 60, so at P = $20 it offers 6(20) minus 60 = 60 loaves and at P = $25 it offers 90 loaves. Now flour costs rise by $3 per loaf. Sellers need $3 more than before to supply any given quantity, so the curve shifts up vertically by $3, which is the same thing as shifting left. The new curve is Qs = 6(P minus 3) minus 60 = 6P minus 78. At the unchanged price of $20, quantity supplied drops to 120 minus 78 = 42 loaves, a fall of 18. To coax the original 60 loaves back out, price has to reach $23, since 6(23) minus 78 = 60. The vertical shift of $3 matches the cost increase exactly, while the horizontal shift of 18 loaves depends on how steep the curve is.
The mistake students make with determinants of supply
Two traps recur. The first is direction. Higher input costs decrease supply, and that one change is both an upward shift and a leftward shift, which sounds contradictory until you notice that up and right mean the same thing for demand but opposite things for supply. Students who read upward as more then draw the curve rightward and reverse the whole result, so name the change an increase or a decrease before the pencil moves. The second trap is listing higher demand or a higher market price as a supply determinant. Both change quantity supplied along the existing curve and leave the curve itself alone.
Determinants of Supply questions
What are the determinants of supply?
Six shifters move a supply curve: input or resource prices, technology, the number of sellers, producer expectations about future prices, prices of related goods a firm could produce instead, and government action through taxes, subsidies and regulation. Each one changes the quantity offered at every price. The good's own price is not on the list, because a price change moves sellers along the curve they already face rather than relocating that curve.
Does a subsidy shift supply left or right?
A per-unit subsidy shifts supply right, or equivalently down by the subsidy amount. Paying producers $4 per unit means they will accept $4 less from buyers for any given quantity, so the whole curve drops vertically by $4. Equilibrium price falls and equilibrium quantity rises. A per-unit tax does the mirror image, shifting supply up by the tax, lifting the price buyers pay and cutting the quantity traded.
How does technology change supply?
Better technology raises output per unit of input and lowers the cost of each unit produced, so supply shifts right. If a new oven lets a bakery make each loaf for $2 less, sellers will supply the old quantity at a price $2 lower, and at the old price they supply more than before. Equilibrium price falls while equilibrium quantity rises. Technology almost never shifts supply left, making it one of the safer shifters to identify.
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Related terms
Common comparisons
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