6 FACTORS THAT MAY SHIFT THE SUPPLY CURVE
How does competition affect the supply curve?
If there is competition in the market, prices will fall to low levels for businesses to compete with each other. Lower prices means that the businesses are less willing to supply more, and the supply curve will shift to the left.
What do you call movement up and down the supply curve due to price?
Increases: extension of supply Decreases: contraction of supply
How does indirect taxes shift the supply curve?
Indirect taxes are taxes on spending. VAT (valued- added tax) and duties, such as those on petrol and cigarettes, are examples of indirect taxes. Such taxes have an effect on supply. When they are imposed or increased, the supply curve will shift to the left. This is because indirect taxes represent a cost to firms. In Figure 6.2, the imposition of a tax would shift the supply curve to the left from S1 to S2. As a result, the quantity supplied would fall from q1 to q2. If indirect taxes are reduced, the supply curve will shift to the right because costs are lower. In Figure 6.2, lower indirect taxes would shift the supply curve from S1 to S3. As a result, the quantity supplied would rise from q1 to q3. Governments use indirect taxes to raise revenue for government expenditure and discourage the consumption of harmful products, such as cigarettes and alcohol. Indirect taxes might also be used to protect the environment. For example, taxes might be imposed on producers if their production methods result in damage to the environment.
How does changes in technology shift the supply curve?
Over a period of time, new technology becomes available that many businesses use in their production processes. New technology is more efficient and can therefore reduce the costs of production. For example, when the price of oil fell sharply in 2014, many oil companies began to use new technology to lower their costs. Some companies began to use lasers and other hi-tech data analysis equipment to help measure the potential yield from new oil wells. Others used new techniques to help them produce more oil from both old and new wells. Since the introduction of new technology will help to lower production costs, firms are likely to offer more for sale. As a result there will be a shift in the supply curve to the right, from S1 to S3 in Fig 6.2.
What are factors that may shift the supply curve?
Production costs Indirect taxes Natural factors Technology (new) Subsidies Weather Competition
How does subsidies shift the supply curve?
Sometimes the government may give money to businesses in the form of a grant. This is called a subsidy. Subsidies may be given to firms to try to encourage them to produce a particular product. For example, in the EU, subsidies have been given to farmers to encourage them to produce certain agricultural products. If the government grants a subsidy on a good, the effect is to increase its supply. This is because subsidies help to reduce production costs. As a result, the supply curve will shift to the right, from S1 to S3 in Fig 6.2. This causes the amount supplied at p1 to rise from q1 to q3. However, government subsidies to producers may have negative effects. For example, producers may lack the incentive to improve efficiency. Another problem is that the government will incur an opportunity cost when spending on subsidies. The money spent might be used on other items of government expenditure, such as education.
How does natural factors shift the supply curve?
The production of some goods is influenced by natural factors such as the weather, natural disasters, or the presence of pests (for example, rats or mice) or diseases. This is true of many agricultural products. For example, good growing conditions can help to improve crop yields, which will increase supply. This will shift the supply curve to the right - from S1 to S3 in Fig 6.2. In contrast, poor growing conditions can cause severe shortages and the quantity supplied may be cut. This will shift the supply curve to the left, from S1 to S2 in Fig 6.2. In 2016, there was a shortage of squid due to the effect of El Nino. El Nino is a natural but irregular climatic event responsible for raising the temperature of the sea along the coast of Ecuador and Peru. It can have far reaching effects. For example, it reduces the amount of nutrients in the sea that are essential to support marine life. It can also cause a change in wind patterns across the Pacific Ocean, drought (long periods of unusually dry weather) in Australasia and heavy rain in South America. El Nino caused a shortfall in the supply of squid, which forced prices up from US$1.80 to US$2.20 per prepared squid in the USA. Catch totals of squid for the 2015/2016 season were 37000 tonnes, only 35 per cent of the seasonal catch limit of 107 000 tonnes.
How does production costs shift the supply curve?
The quantity supplied of any product is influenced by the costs of production, such as wages, raw materials, energy, rent and machinery. Assuming the price is fixed, if production costs rise, sellers are likely to reduce supply. This is because their profits will be reduced. This is what happened in the example in 'Getting started'. The rising cost of fish feed resulted in some fish farmers leaving the industry, causing the quantity supplied to fall. A rise in costs will cause the supply curve to shift to the left, from S1 to S2. At a price of p1, the amount supplied in the market falls from q1 to q2. If costs fall, the quantity supplied would increase because production becomes more profitable. As a result, the supply curve will shift to the right. This shows that more is supplied at every price. The new supply curve is S3 and the amount supplied at p1 will rise from q1 to q3. The availability of resources will also affect supply. If there is a shortage in some of the factors of production - for example, land, labour or capital - this will cause it to be difficult for producers to supply the market because their costs are likely to rise.