{"id":5722,"date":"2016-07-27T18:09:50","date_gmt":"2016-07-27T18:09:50","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/masterybusiness2xngcxmasterspring2016\/?post_type=chapter&#038;p=5722"},"modified":"2024-05-02T19:34:03","modified_gmt":"2024-05-02T19:34:03","slug":"factors-affecting-supply","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-introductiontobusiness\/chapter\/factors-affecting-supply\/","title":{"raw":"Factors Affecting Supply","rendered":"Factors Affecting Supply"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Explain the factors that can change supply<\/li>\r\n<\/ul>\r\n<\/div>\r\n<h2>How Production Costs Affect Supply<\/h2>\r\n<img class=\"alignright wp-image-12051\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/01204721\/carss-e1541105271761-1024x509.jpg\" alt=\"decorative image\" width=\"400\" height=\"199\" \/>A supply curve shows how quantity supplied will change as the price rises and falls, assuming <span class=\"emphasis\"><em>ceteris paribus,\u00a0<\/em><\/span>so that no other economically relevant factors are changing. If other factors relevant to supply do change, then the entire supply curve will shift. Just as a shift in demand is represented by a change in the quantity demanded at every price, a <strong>shift in supply<\/strong> means a change in the quantity supplied at every price.\r\n\r\nIn thinking about the factors that affect supply, remember what motivates firms: profits, which are the difference between revenues and costs. Goods and services are produced using combinations of labor, materials, and machinery, or what we call <strong>inputs<\/strong>\u00a0(also called\u00a0<strong>factors of production)<\/strong>. If a firm faces lower costs of production, then while the prices for the good or service that the firm produces remain unchanged, a firm's profits go up. When a firm's profits increase, it's more motivated to produce <strong>output\u00a0<\/strong>(goods or services), since the more it produces, the more profit it will earn. So, when costs of production fall, a firm will tend to supply a larger quantity at any given price for its output. This can be shown by the supply curve shifting to the right.\r\n\r\nTake, for example, a messenger company that delivers packages around a city. The company may find that buying gasoline is one of its main costs. If the price of gasoline falls, then the company will find it can deliver packages\u00a0more cheaply than before. Since lower costs correspond to higher profits, the messenger company may now supply more of its services at any given price. For example, given the lower gasoline prices, the company can now serve a greater area and increase its supply.\r\n\r\nConversely, if a firm faces higher costs of production, then it will earn lower profits at any given selling price for its products. As a result, a higher cost of production typically causes a firm to supply a smaller quantity at any given price. In this case, the supply curve shifts to the left.\r\n\r\nConsider the supply for cars, shown by curve S<sub>0<\/sub> in Figure 1, below. Point J indicates that if the price is $20,000, the quantity supplied will be 18 million cars. If the price rises to $22,000 per car, <span class=\"emphasis\"><em>ceteris paribus,<\/em><\/span>\u00a0then the quantity supplied will rise to 20 million cars, as point K on the S<sub>0<\/sub> curve shows. The same information can be shown in table form, as in Table 1.\r\n\r\n[caption id=\"attachment_13570\" align=\"alignnone\" width=\"1024\"]<img class=\"wp-image-13570 size-large\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10000132\/CNX_Econ_C03_00711-1024x655.jpg\" alt=\"The graph shows supply curve S sub 0 as the original supply curve. Supply curve S sub 1 represents a shift based on decreased supply. Supply curve S sub 2 represents a shift based on increased supply. All data points shown on this graph can be found in Table 1. Additionally, there are four points on the graph labeled J, K, L, and M. J is on demand curve S sub 0 at price $20,000 and quantity 18 million. K is on demand curve S sub 0 at price $22,000 and quantity 20 million. L is on demand curve S sub 1 at price $20,000 and quantity 16.5 million. M is on demand curve S sub 2 at price $20,000 and quantity 19.8 million.\" width=\"1024\" height=\"655\" \/> <strong>Figure 1.<\/strong> <strong>Shifts in Supply: A Car Example<\/strong>[\/caption]\r\n<table><caption>Table 1. Price and Shifts in Supply: A Car Example<\/caption>\r\n<thead>\r\n<tr>\r\n<th scope=\"col\"><strong>Price<\/strong><\/th>\r\n<th scope=\"col\"><strong>Decrease to S<sub>1<\/sub><\/strong><\/th>\r\n<th scope=\"col\"><strong>Original Quantity Supplied S<sub>0<\/sub><\/strong><\/th>\r\n<th scope=\"col\"><strong>Increase to S<sub>2<\/sub><\/strong><\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>\u00a0$16,000<\/td>\r\n<td>10.5 million<\/td>\r\n<td>12.0 million<\/td>\r\n<td>13.2 million<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$18,000<\/td>\r\n<td>13.5 million<\/td>\r\n<td>15.0\u00a0million<\/td>\r\n<td>16.5\u00a0million<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0$20,000<\/td>\r\n<td>16.5\u00a0million<\/td>\r\n<td>18.0 million<\/td>\r\n<td>19.8\u00a0million<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$22,000<\/td>\r\n<td>18.5\u00a0million<\/td>\r\n<td>20.0\u00a0million<\/td>\r\n<td>22.0\u00a0million<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$24,000<\/td>\r\n<td>19.5\u00a0million<\/td>\r\n<td>21.0\u00a0million<\/td>\r\n<td>23.1\u00a0million<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNow, imagine that the price of steel\u2014an important component\u00a0in vehicle\u00a0manufacturing\u2014rises, so that producing a car\u00a0has become more expensive. At any given price for selling cars, car manufacturers will react by supplying a lower quantity. This can be shown graphically as a leftward shift of supply, from S<sub>0<\/sub> to S<sub>1<\/sub>, which indicates that at any given price, the quantity supplied decreases. In this example, at a price of $20,000, the quantity supplied decreases from 18 million on the original supply curve (S<sub>0<\/sub>) to 16.5 million on the supply curve S<sub>1<\/sub>, which is labeled as point L.\r\n\r\nConversely, if the price of steel decreases, then producing a car becomes less expensive. At any given price for selling cars, car manufacturers can now expect to earn higher profits, so they will supply a higher quantity. The shift of supply to the right, from S<sub>0<\/sub> to S<sub>2<\/sub>, means that at all prices, the quantity supplied has increased. In this example, at a price of $20,000, the quantity supplied increases from 18 million on the original supply curve (S<sub>0<\/sub>) to 19.8 million on the supply curve S<sub>2<\/sub>, which is labeled M.\r\n<h2><span class=\"cnx-gentext-section cnx-gentext-t\">Other Factors That Affect Supply\u00a0<\/span><\/h2>\r\n<img class=\"alignright wp-image-5835\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/143\/2016\/07\/27163028\/2489268630_8edf4afa70_b-1024x687.jpg\" alt=\"decorative image\" width=\"350\" height=\"235\" \/>In the example above, we saw that changes in the prices of inputs in the production process will affect the cost of production, and thus the supply. Several other things affect the cost of production, too, such as changes in weather or other natural conditions, new technologies for production, and some government policies.\r\n\r\nThe cost of production for many agricultural products will be affected by changes in natural conditions. For example, the area of northern China that\u00a0typically grows about 60 percent of the country's wheat output experienced its worst drought in at least 50 years in the second half of 2009. A drought decreases the supply of agricultural products, which means that at any given price, a lower quantity will be supplied; conversely, especially good weather would shift the supply curve to the right.\r\n\r\nWhen a firm discovers a new technology that allows it to produce at a lower cost, the supply curve will shift to the right, as well. For instance, in the 1960s, a major scientific effort nicknamed the Green Revolution focused on breeding improved seeds for basic crops, like wheat and rice. By the early 1990s, more than two-thirds of the wheat and rice in low-income countries around the world was grown with these Green Revolution seeds\u2014and the harvest was twice as high per acre. A technological improvement that reduces costs of production will shift supply to the right, so that a greater quantity will be produced at any given price.\r\n\r\nGovernment policies can affect the cost of production and the supply curve through taxes, regulations, and subsidies. For example, the U.S. government imposes a tax on alcoholic beverages that collects about $8 billion per year from producers. Taxes are treated as costs by businesses. Higher costs decrease supply for the reasons discussed above. Other examples of policy that can affect cost are the wide array of government regulations that require firms to spend money to provide a cleaner environment or a safer workplace; complying with regulations increases costs.\r\n\r\nA government subsidy, on the other hand, is the opposite of a tax. A <strong>subsidy<\/strong> occurs when the government pays a firm directly or reduces the firm's taxes if the firm carries out certain actions. From the firm's perspective, taxes or regulations are an additional cost of production that shifts supply to the left, leading the firm to produce a lower quantity at every given price. Government subsidies reduce the cost of production and increase supply at every given price, shifting supply to the right.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/a6704d66-6e2b-49f5-a9b6-7f4bd0a3dc12\r\n\r\nhttps:\/\/assess.lumenlearning.com\/practice\/9a28fc87-11c8-4113-a3de-548471e8d8be\r\n\r\n<\/div>\r\n<div class=\"textbox exercises\">\r\n<h3>Summary<\/h3>\r\nChanges in the cost of inputs, natural disasters, new technologies, and the impact of government decisions all affect the cost of production. In turn, these factors affect how much firms are willing to supply at any given price.\r\n\r\nFigure 2, below, summarizes factors that change the supply of goods and services. Notice that a change in the price of the product itself is not among the factors that shift the supply curve. Although a change in price of a good or service typically causes a change in quantity supplied or a movement along the supply curve for that specific good or service, it does not cause the supply curve itself to shift.\r\n\r\n[caption id=\"attachment_13659\" align=\"aligncenter\" width=\"1024\"]<img class=\"wp-image-13659 size-large\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/12200443\/Module2_p7hm_Update-1024x315.jpg\" alt=\"Two graphs. One showing the supply curve shifting to the right and a list of factors that would cause an increase in supply. The other graph shows the supply curve shifting to the left and lists the factors that would cause a decrease in supply. Factors that could increase supply include: Favorable natural conditions for production, a fall in input prices, improved technology, and lower product taxes \/ less costly regulations. Factors that could decrease supply include: poor natural conditions for production, a rise in input prices, a decline in technology (not common), and higher product taxes \/ more costly regulations.\" width=\"1024\" height=\"315\" \/> <strong>Figure 2.<\/strong> <strong>Factors That Shift Supply Curves.<\/strong> (a) A list of factors that can cause an increase in supply from S<sub>0<\/sub> to S<sub>1<\/sub>. (b) The same factors, if their direction is reversed, can cause a decrease in supply from S<sub>0<\/sub> to S<sub>1<\/sub>.[\/caption]\r\n\r\nBecause demand and supply curves appear on a two-dimensional diagram with only price and quantity on the axes, an unwary visitor to the land of economics might be fooled into believing that economics is about only four topics: demand, supply, price, and quantity. However, demand and supply are really \"umbrella\" concepts: demand covers all the factors that affect demand, and supply covers all the factors that affect supply. Factors other than price that affect demand and supply are included by using shifts in the demand or the supply curve. In this way, the two-dimensional demand and supply model becomes a powerful tool for analyzing a wide range of economic circumstances.\r\n\r\n<\/div>\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/98a1b289-c01c-4668-889b-55dde22b7700\r\n\r\n<\/div>\r\n<div class=\"textbox examples\">\r\n<h3>Worked Example: Shift in Supply Due to\u00a0Production-Cost Increase<\/h3>\r\nWe know that a supply curve shows the minimum price a firm will accept to produce a given quantity of output. What happens to the supply curve when the cost of production goes up? The following is an example of a shift in supply due to an increase in production cost.\r\n\r\n<strong>Step 1<\/strong>. Draw a graph of a supply curve for pizza. Pick a quantity (like Q<sub>0<\/sub>). If you draw a vertical line up from Q<sub>0<\/sub> to the supply curve, then you will see the price the firm chooses. An example is shown in Figure 3.\r\n\r\n[caption id=\"attachment_13572\" align=\"aligncenter\" width=\"350\"]<img class=\"wp-image-13572\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10000308\/Fig1SupplyCurve2-1024x945.jpg\" alt=\"The graph represents the directions for step 1. A supply curve shows the minimum price a firm will accept (P sub 0) to supply a given quantity of output (Q sub 0). The curve is upward sloping, price is represented on the y axis and quantity represented on the x axis.\" width=\"350\" height=\"322\" \/> <strong>Figure 3<\/strong> <strong>Supply Curve<\/strong>. The supply curve can be used to show the minimum price a firm will accept to produce a given quantity of output.[\/caption]\r\n\r\n<strong>Step 2<\/strong>. Why did the firm choose that price and not some other? One way to think about this is that the price is composed of two parts. The first part is the average cost of production: in this case, the cost of the pizza ingredients (dough, sauce, cheese, pepperoni, and so on); the cost of the pizza oven; the rent on the shop; and the wages of the workers. The second part is the firm's desired profit, which is determined, among other factors, by the profit margins in that particular business. If you add these two parts together, you get the price the firm wishes to charge. The quantity Q<sub>0<\/sub> and associated price P<sub>0<\/sub> give you one point on the firm's supply curve, as shown in Figure 4.\r\n\r\n[caption id=\"attachment_13573\" align=\"aligncenter\" width=\"350\"]<img class=\"wp-image-13573\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10000344\/Fig2SettingPrices1-1024x968.jpg\" alt=\"The graph represents the directions for step 2. For a given quantity of output (Q sub 0), the firm wishes to charge a price (P sub 0) which is equal to the cost of production plus the desired profit margin.\" width=\"350\" height=\"331\" \/> <strong>Figure 4.<\/strong> <strong>Setting Prices<\/strong>. The cost of production and the desired profit equal the price a firm will set for a product.[\/caption]\r\n\r\n<strong>Step 3<\/strong>. Now, suppose that the cost of production goes up. Perhaps cheese has become more expensive by $0.75 per pizza. If that is true, then the firm will want to raise its price by the amount of the increase in cost ($0.75). Draw this point on the supply curve directly above the initial point on the curve, but $0.75 higher, as shown in Figure 5.\r\n\r\n[caption id=\"attachment_13574\" align=\"aligncenter\" width=\"350\"]<img class=\"wp-image-13574\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10000430\/Fig3IncreasingCostsLeadtoIncreasingPrice1-1024x983.jpg\" alt=\"The graph represents the directions for step 3. An increase in production cost by 75 cents will raise the price a firm wishes to charge (to P sub 1) for a given quantity of output (Q sub 0) by 75 cents because the firm wishes to make the same desired profit. The original supply curve is shown with Q sub 0 and P sub 0, and P sub 1 (the new equilibrium price) is shown above the supply curve.\" width=\"350\" height=\"336\" \/> <strong>Figure 5.<\/strong> <strong>Increasing Costs Lead to Increasing Price.<\/strong> Because the cost of production plus the desired profit equal the price a firm will set for a product, if the cost of production increases, then the price for the product will also need to increase.[\/caption]\r\n\r\n<strong>Step 4<\/strong>. Shift the supply curve through this point. You will see that an increase in cost causes <span style=\"color: #000000;\">a leftward shift <\/span>of the supply curve so that at any price, the quantities supplied will be smaller, as shown in Figure 6.<span style=\"color: #ff0000;\">\u00a0<\/span>\r\n\r\n[caption id=\"attachment_13575\" align=\"aligncenter\" width=\"350\"]<img class=\"wp-image-13575\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10000512\/Fig4SupplyCurveShiftedLeft1-1024x938.jpg\" alt=\"The graph represents the directions for step 4. The original supply curve is shown, but the new supply curve poses through P sub 1. An increase in the cost of production will shift the supply curve vertically by the amount of the cost increase.\" width=\"350\" height=\"320\" \/> <strong>Figure 6. Supply Curve Shifted Left<\/strong>. When the cost of production increases, the supply curve shifts leftward to a new price level.[\/caption]\r\n\r\n<\/div>\r\n<h2>Simulation: Supply of Food Trucks<\/h2>\r\nPlay the simulation below multiple times to see how different choices lead to different outcomes. All simulations allow unlimited attempts, so that you can gain experience applying the concepts.\r\n\r\n<iframe src=\"https:\/\/www.branchtrack.com\/projects\/j514ez29\/embed\" width=\"850\" height=\"500\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Explain the factors that can change supply<\/li>\n<\/ul>\n<\/div>\n<h2>How Production Costs Affect Supply<\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-12051\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/01204721\/carss-e1541105271761-1024x509.jpg\" alt=\"decorative image\" width=\"400\" height=\"199\" \/>A supply curve shows how quantity supplied will change as the price rises and falls, assuming <span class=\"emphasis\"><em>ceteris paribus,\u00a0<\/em><\/span>so that no other economically relevant factors are changing. If other factors relevant to supply do change, then the entire supply curve will shift. Just as a shift in demand is represented by a change in the quantity demanded at every price, a <strong>shift in supply<\/strong> means a change in the quantity supplied at every price.<\/p>\n<p>In thinking about the factors that affect supply, remember what motivates firms: profits, which are the difference between revenues and costs. Goods and services are produced using combinations of labor, materials, and machinery, or what we call <strong>inputs<\/strong>\u00a0(also called\u00a0<strong>factors of production)<\/strong>. If a firm faces lower costs of production, then while the prices for the good or service that the firm produces remain unchanged, a firm&#8217;s profits go up. When a firm&#8217;s profits increase, it&#8217;s more motivated to produce <strong>output\u00a0<\/strong>(goods or services), since the more it produces, the more profit it will earn. So, when costs of production fall, a firm will tend to supply a larger quantity at any given price for its output. This can be shown by the supply curve shifting to the right.<\/p>\n<p>Take, for example, a messenger company that delivers packages around a city. The company may find that buying gasoline is one of its main costs. If the price of gasoline falls, then the company will find it can deliver packages\u00a0more cheaply than before. Since lower costs correspond to higher profits, the messenger company may now supply more of its services at any given price. For example, given the lower gasoline prices, the company can now serve a greater area and increase its supply.<\/p>\n<p>Conversely, if a firm faces higher costs of production, then it will earn lower profits at any given selling price for its products. As a result, a higher cost of production typically causes a firm to supply a smaller quantity at any given price. In this case, the supply curve shifts to the left.<\/p>\n<p>Consider the supply for cars, shown by curve S<sub>0<\/sub> in Figure 1, below. Point J indicates that if the price is $20,000, the quantity supplied will be 18 million cars. If the price rises to $22,000 per car, <span class=\"emphasis\"><em>ceteris paribus,<\/em><\/span>\u00a0then the quantity supplied will rise to 20 million cars, as point K on the S<sub>0<\/sub> curve shows. The same information can be shown in table form, as in Table 1.<\/p>\n<div id=\"attachment_13570\" style=\"width: 1034px\" class=\"wp-caption alignnone\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-13570\" class=\"wp-image-13570 size-large\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10000132\/CNX_Econ_C03_00711-1024x655.jpg\" alt=\"The graph shows supply curve S sub 0 as the original supply curve. Supply curve S sub 1 represents a shift based on decreased supply. Supply curve S sub 2 represents a shift based on increased supply. All data points shown on this graph can be found in Table 1. Additionally, there are four points on the graph labeled J, K, L, and M. J is on demand curve S sub 0 at price $20,000 and quantity 18 million. K is on demand curve S sub 0 at price $22,000 and quantity 20 million. L is on demand curve S sub 1 at price $20,000 and quantity 16.5 million. M is on demand curve S sub 2 at price $20,000 and quantity 19.8 million.\" width=\"1024\" height=\"655\" \/><\/p>\n<p id=\"caption-attachment-13570\" class=\"wp-caption-text\"><strong>Figure 1.<\/strong> <strong>Shifts in Supply: A Car Example<\/strong><\/p>\n<\/div>\n<table>\n<caption>Table 1. Price and Shifts in Supply: A Car Example<\/caption>\n<thead>\n<tr>\n<th scope=\"col\"><strong>Price<\/strong><\/th>\n<th scope=\"col\"><strong>Decrease to S<sub>1<\/sub><\/strong><\/th>\n<th scope=\"col\"><strong>Original Quantity Supplied S<sub>0<\/sub><\/strong><\/th>\n<th scope=\"col\"><strong>Increase to S<sub>2<\/sub><\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>\u00a0$16,000<\/td>\n<td>10.5 million<\/td>\n<td>12.0 million<\/td>\n<td>13.2 million<\/td>\n<\/tr>\n<tr>\n<td>$18,000<\/td>\n<td>13.5 million<\/td>\n<td>15.0\u00a0million<\/td>\n<td>16.5\u00a0million<\/td>\n<\/tr>\n<tr>\n<td>\u00a0$20,000<\/td>\n<td>16.5\u00a0million<\/td>\n<td>18.0 million<\/td>\n<td>19.8\u00a0million<\/td>\n<\/tr>\n<tr>\n<td>$22,000<\/td>\n<td>18.5\u00a0million<\/td>\n<td>20.0\u00a0million<\/td>\n<td>22.0\u00a0million<\/td>\n<\/tr>\n<tr>\n<td>$24,000<\/td>\n<td>19.5\u00a0million<\/td>\n<td>21.0\u00a0million<\/td>\n<td>23.1\u00a0million<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Now, imagine that the price of steel\u2014an important component\u00a0in vehicle\u00a0manufacturing\u2014rises, so that producing a car\u00a0has become more expensive. At any given price for selling cars, car manufacturers will react by supplying a lower quantity. This can be shown graphically as a leftward shift of supply, from S<sub>0<\/sub> to S<sub>1<\/sub>, which indicates that at any given price, the quantity supplied decreases. In this example, at a price of $20,000, the quantity supplied decreases from 18 million on the original supply curve (S<sub>0<\/sub>) to 16.5 million on the supply curve S<sub>1<\/sub>, which is labeled as point L.<\/p>\n<p>Conversely, if the price of steel decreases, then producing a car becomes less expensive. At any given price for selling cars, car manufacturers can now expect to earn higher profits, so they will supply a higher quantity. The shift of supply to the right, from S<sub>0<\/sub> to S<sub>2<\/sub>, means that at all prices, the quantity supplied has increased. In this example, at a price of $20,000, the quantity supplied increases from 18 million on the original supply curve (S<sub>0<\/sub>) to 19.8 million on the supply curve S<sub>2<\/sub>, which is labeled M.<\/p>\n<h2><span class=\"cnx-gentext-section cnx-gentext-t\">Other Factors That Affect Supply\u00a0<\/span><\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-5835\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/143\/2016\/07\/27163028\/2489268630_8edf4afa70_b-1024x687.jpg\" alt=\"decorative image\" width=\"350\" height=\"235\" \/>In the example above, we saw that changes in the prices of inputs in the production process will affect the cost of production, and thus the supply. Several other things affect the cost of production, too, such as changes in weather or other natural conditions, new technologies for production, and some government policies.<\/p>\n<p>The cost of production for many agricultural products will be affected by changes in natural conditions. For example, the area of northern China that\u00a0typically grows about 60 percent of the country&#8217;s wheat output experienced its worst drought in at least 50 years in the second half of 2009. A drought decreases the supply of agricultural products, which means that at any given price, a lower quantity will be supplied; conversely, especially good weather would shift the supply curve to the right.<\/p>\n<p>When a firm discovers a new technology that allows it to produce at a lower cost, the supply curve will shift to the right, as well. For instance, in the 1960s, a major scientific effort nicknamed the Green Revolution focused on breeding improved seeds for basic crops, like wheat and rice. By the early 1990s, more than two-thirds of the wheat and rice in low-income countries around the world was grown with these Green Revolution seeds\u2014and the harvest was twice as high per acre. A technological improvement that reduces costs of production will shift supply to the right, so that a greater quantity will be produced at any given price.<\/p>\n<p>Government policies can affect the cost of production and the supply curve through taxes, regulations, and subsidies. For example, the U.S. government imposes a tax on alcoholic beverages that collects about $8 billion per year from producers. Taxes are treated as costs by businesses. Higher costs decrease supply for the reasons discussed above. Other examples of policy that can affect cost are the wide array of government regulations that require firms to spend money to provide a cleaner environment or a safer workplace; complying with regulations increases costs.<\/p>\n<p>A government subsidy, on the other hand, is the opposite of a tax. A <strong>subsidy<\/strong> occurs when the government pays a firm directly or reduces the firm&#8217;s taxes if the firm carries out certain actions. From the firm&#8217;s perspective, taxes or regulations are an additional cost of production that shifts supply to the left, leading the firm to produce a lower quantity at every given price. Government subsidies reduce the cost of production and increase supply at every given price, shifting supply to the right.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_a6704d66-6e2b-49f5-a9b6-7f4bd0a3dc12\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/a6704d66-6e2b-49f5-a9b6-7f4bd0a3dc12?iframe_resize_id=assessment_practice_id_a6704d66-6e2b-49f5-a9b6-7f4bd0a3dc12\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<p>\t<iframe id=\"assessment_practice_9a28fc87-11c8-4113-a3de-548471e8d8be\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/9a28fc87-11c8-4113-a3de-548471e8d8be?iframe_resize_id=assessment_practice_id_9a28fc87-11c8-4113-a3de-548471e8d8be\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<div class=\"textbox exercises\">\n<h3>Summary<\/h3>\n<p>Changes in the cost of inputs, natural disasters, new technologies, and the impact of government decisions all affect the cost of production. In turn, these factors affect how much firms are willing to supply at any given price.<\/p>\n<p>Figure 2, below, summarizes factors that change the supply of goods and services. Notice that a change in the price of the product itself is not among the factors that shift the supply curve. Although a change in price of a good or service typically causes a change in quantity supplied or a movement along the supply curve for that specific good or service, it does not cause the supply curve itself to shift.<\/p>\n<div id=\"attachment_13659\" style=\"width: 1034px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-13659\" class=\"wp-image-13659 size-large\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/12200443\/Module2_p7hm_Update-1024x315.jpg\" alt=\"Two graphs. One showing the supply curve shifting to the right and a list of factors that would cause an increase in supply. The other graph shows the supply curve shifting to the left and lists the factors that would cause a decrease in supply. Factors that could increase supply include: Favorable natural conditions for production, a fall in input prices, improved technology, and lower product taxes \/ less costly regulations. Factors that could decrease supply include: poor natural conditions for production, a rise in input prices, a decline in technology (not common), and higher product taxes \/ more costly regulations.\" width=\"1024\" height=\"315\" \/><\/p>\n<p id=\"caption-attachment-13659\" class=\"wp-caption-text\"><strong>Figure 2.<\/strong> <strong>Factors That Shift Supply Curves.<\/strong> (a) A list of factors that can cause an increase in supply from S<sub>0<\/sub> to S<sub>1<\/sub>. (b) The same factors, if their direction is reversed, can cause a decrease in supply from S<sub>0<\/sub> to S<sub>1<\/sub>.<\/p>\n<\/div>\n<p>Because demand and supply curves appear on a two-dimensional diagram with only price and quantity on the axes, an unwary visitor to the land of economics might be fooled into believing that economics is about only four topics: demand, supply, price, and quantity. However, demand and supply are really &#8220;umbrella&#8221; concepts: demand covers all the factors that affect demand, and supply covers all the factors that affect supply. Factors other than price that affect demand and supply are included by using shifts in the demand or the supply curve. In this way, the two-dimensional demand and supply model becomes a powerful tool for analyzing a wide range of economic circumstances.<\/p>\n<\/div>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p>\t<iframe id=\"assessment_practice_98a1b289-c01c-4668-889b-55dde22b7700\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/98a1b289-c01c-4668-889b-55dde22b7700?iframe_resize_id=assessment_practice_id_98a1b289-c01c-4668-889b-55dde22b7700\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<div class=\"textbox examples\">\n<h3>Worked Example: Shift in Supply Due to\u00a0Production-Cost Increase<\/h3>\n<p>We know that a supply curve shows the minimum price a firm will accept to produce a given quantity of output. What happens to the supply curve when the cost of production goes up? The following is an example of a shift in supply due to an increase in production cost.<\/p>\n<p><strong>Step 1<\/strong>. Draw a graph of a supply curve for pizza. Pick a quantity (like Q<sub>0<\/sub>). If you draw a vertical line up from Q<sub>0<\/sub> to the supply curve, then you will see the price the firm chooses. An example is shown in Figure 3.<\/p>\n<div id=\"attachment_13572\" style=\"width: 360px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-13572\" class=\"wp-image-13572\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10000308\/Fig1SupplyCurve2-1024x945.jpg\" alt=\"The graph represents the directions for step 1. A supply curve shows the minimum price a firm will accept (P sub 0) to supply a given quantity of output (Q sub 0). The curve is upward sloping, price is represented on the y axis and quantity represented on the x axis.\" width=\"350\" height=\"322\" \/><\/p>\n<p id=\"caption-attachment-13572\" class=\"wp-caption-text\"><strong>Figure 3<\/strong> <strong>Supply Curve<\/strong>. The supply curve can be used to show the minimum price a firm will accept to produce a given quantity of output.<\/p>\n<\/div>\n<p><strong>Step 2<\/strong>. Why did the firm choose that price and not some other? One way to think about this is that the price is composed of two parts. The first part is the average cost of production: in this case, the cost of the pizza ingredients (dough, sauce, cheese, pepperoni, and so on); the cost of the pizza oven; the rent on the shop; and the wages of the workers. The second part is the firm&#8217;s desired profit, which is determined, among other factors, by the profit margins in that particular business. If you add these two parts together, you get the price the firm wishes to charge. The quantity Q<sub>0<\/sub> and associated price P<sub>0<\/sub> give you one point on the firm&#8217;s supply curve, as shown in Figure 4.<\/p>\n<div id=\"attachment_13573\" style=\"width: 360px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-13573\" class=\"wp-image-13573\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10000344\/Fig2SettingPrices1-1024x968.jpg\" alt=\"The graph represents the directions for step 2. For a given quantity of output (Q sub 0), the firm wishes to charge a price (P sub 0) which is equal to the cost of production plus the desired profit margin.\" width=\"350\" height=\"331\" \/><\/p>\n<p id=\"caption-attachment-13573\" class=\"wp-caption-text\"><strong>Figure 4.<\/strong> <strong>Setting Prices<\/strong>. The cost of production and the desired profit equal the price a firm will set for a product.<\/p>\n<\/div>\n<p><strong>Step 3<\/strong>. Now, suppose that the cost of production goes up. Perhaps cheese has become more expensive by $0.75 per pizza. If that is true, then the firm will want to raise its price by the amount of the increase in cost ($0.75). Draw this point on the supply curve directly above the initial point on the curve, but $0.75 higher, as shown in Figure 5.<\/p>\n<div id=\"attachment_13574\" style=\"width: 360px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-13574\" class=\"wp-image-13574\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10000430\/Fig3IncreasingCostsLeadtoIncreasingPrice1-1024x983.jpg\" alt=\"The graph represents the directions for step 3. An increase in production cost by 75 cents will raise the price a firm wishes to charge (to P sub 1) for a given quantity of output (Q sub 0) by 75 cents because the firm wishes to make the same desired profit. The original supply curve is shown with Q sub 0 and P sub 0, and P sub 1 (the new equilibrium price) is shown above the supply curve.\" width=\"350\" height=\"336\" \/><\/p>\n<p id=\"caption-attachment-13574\" class=\"wp-caption-text\"><strong>Figure 5.<\/strong> <strong>Increasing Costs Lead to Increasing Price.<\/strong> Because the cost of production plus the desired profit equal the price a firm will set for a product, if the cost of production increases, then the price for the product will also need to increase.<\/p>\n<\/div>\n<p><strong>Step 4<\/strong>. Shift the supply curve through this point. You will see that an increase in cost causes <span style=\"color: #000000;\">a leftward shift <\/span>of the supply curve so that at any price, the quantities supplied will be smaller, as shown in Figure 6.<span style=\"color: #ff0000;\">\u00a0<\/span><\/p>\n<div id=\"attachment_13575\" style=\"width: 360px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-13575\" class=\"wp-image-13575\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10000512\/Fig4SupplyCurveShiftedLeft1-1024x938.jpg\" alt=\"The graph represents the directions for step 4. The original supply curve is shown, but the new supply curve poses through P sub 1. An increase in the cost of production will shift the supply curve vertically by the amount of the cost increase.\" width=\"350\" height=\"320\" \/><\/p>\n<p id=\"caption-attachment-13575\" class=\"wp-caption-text\"><strong>Figure 6. Supply Curve Shifted Left<\/strong>. When the cost of production increases, the supply curve shifts leftward to a new price level.<\/p>\n<\/div>\n<\/div>\n<h2>Simulation: Supply of Food Trucks<\/h2>\n<p>Play the simulation below multiple times to see how different choices lead to different outcomes. All simulations allow unlimited attempts, so that you can gain experience applying the concepts.<\/p>\n<p><iframe loading=\"lazy\" src=\"https:\/\/www.branchtrack.com\/projects\/j514ez29\/embed\" width=\"850\" height=\"500\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-5722\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Revision and adaptation. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>Simulation: Supply of Food Trucks. <strong>Authored by<\/strong>: Clark Aldrich for Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Principles of Microeconomics Chapter 3.2. <strong>Authored by<\/strong>: OpenStax College. <strong>Provided by<\/strong>: Rice University. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"http:\/\/cnx.org\/contents\/ea2f225e-6063-41ca-bcd8-36482e15ef65@10.31:24\/Microeconomics\">http:\/\/cnx.org\/contents\/ea2f225e-6063-41ca-bcd8-36482e15ef65@10.31:24\/Microeconomics<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em>. <strong>License Terms<\/strong>: Download for free at http:\/\/cnx.org\/content\/col11627\/latest<\/li><li>Golden Spring. <strong>Authored by<\/strong>: Roy Cheung. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.flickr.com\/photos\/alternakive\/2489268630\/\">https:\/\/www.flickr.com\/photos\/alternakive\/2489268630\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc\/4.0\/\">CC BY-NC: Attribution-NonCommercial<\/a><\/em><\/li><li>New Car Hauler. <strong>Authored by<\/strong>: Phil and Jo Schiffbauer. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.flickr.com\/photos\/philandjo\/15776109539\/\">https:\/\/www.flickr.com\/photos\/philandjo\/15776109539\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":26,"menu_order":16,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Principles of 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Schiffbauer\",\"organization\":\"\",\"url\":\"https:\/\/www.flickr.com\/photos\/philandjo\/15776109539\/\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"original\",\"description\":\"Simulation: Supply of Food Trucks\",\"author\":\"Clark Aldrich for Lumen Learning\",\"organization\":\"\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"871a0a02-04d7-460e-a8dd-07f20c45550c, 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