http://ecedweb.unomaha.edu/Dem_Sup/supply.htm

Explorations in Economic Supply, Part III

Nice going! You and Bob, co-owners of the new bluejeans finishing plant, have figured out how important the selling price is in your decisions about how many pairs of bluejeans to supply. And you are certainly aware that other determinants of supply are important too! Indeed, changes in technology, resource prices, taxes or subsidies, expectations, and the price of other goods produced by the same seller are no less important as changes in price.

Oh oh! The $12 wage rate at which you started to hire labor is not enough to hire the level of skills that you need. It appears that you are going to have to pay at least $16 per hour for the workers hired. Using the same other assumptions as before, how will this affect the amount you are willing to sell? The supply curve is still critical, but clearly it won't be the same supply curve as we used before. The production levels from hiring resources is the same as before and so is the the productivity of labor. You just blew it when you estimated the going wage rate!

Changes in these determinants of supply result in a new supply curve, and we say that the supply curve has SHIFTED from the initial position to the new position. Here are the old and new supply relationships for our wage increase. The lighter curve is the original supply curve labelled S1. The darker curve S2 shows how the supply curve changes after the higher wage.

 

Supply Data
Price Price Quantity Supplied
(wage $12) (wage $16)  
$11.00 $12.00 24
$12.00 $13.30 27
$14.00 $16.00 29
$20.00 $24.00 30

We could view the SHIFT in the supply curve as showing that it takes a higher price to provide the same quantity (as the table shows). Also note that the diagram also shows that, for a particular price, say $14.00, a lower amount of the product will be supplied with the new supply curve. We use different ways to describe
(a) a movement along a constant supply curve, which only happens when the price changes, and
(b) a change in the position of the supply curve, which happens when a non-price determinant changes.
We use some specific language to clarify which of these is going on: A CHANGE IN QUANTITY SUPPLIED means that only the price has changed and a new quantity is supplied along a constant supply curve. A CHANGE (DECREASE OR INCREASE) IN SUPPLY or a SHIFT IN SUPPLY means that a change in amount supplied occurs because of a change (shift) in the position of the supply curve. This SHIFT IN SUPPLY means that one of the other determinants of supply (technology, resource prices, taxes or subsidies, expectations, and the price of other goods produced) has changed. In our example, resource prices went up so that less is supplied at each price. This shift could also be called a DECREASE IN SUPPLY.

One of the most important determinants of the position of the supply curve is the technology of production. Check out some facts about the technology, materials, and history of producing bluejeans at Company L. Whoa, did you and Bob know how complicated this could be?? But you have a great idea for making each worker more productive, just a little change in the cutting machines they work with, a wee change in the organization of production, and output will soar. The supply curve? This INCREASE IN SUPPLY can be shown as a shift of the curve to the right, an increase in the amount you are willing to sell at each price.

The second supply diagram shows an INCREASE IN SUPPLY, where again the dark supply curve S2 is in the new position.



For Discussion

1. What happens to the supply curve today if your expectations about the price next month change so that you anticipate significantly higher prices at that time? Yes, it shifts--which way? Why?
2. What happens to the supply curve for bluejeans if the price of another good you produce with the SAME resources becomes significantly higher? Why?
3. Consider each of the determinants individually (one at a time): if that determinant increases, how does that affect the amount of the good that you offer for sale at a particular price?

Have you completed the demand analysis yet? If so, you are ready for the self-quiz on demand and supply.

Maintained by Kim Sosin. Comment via EMail: ksosin at mail.unomaha.edu

Co-Director, UNO Center for Economic Education
Chair, Department of Economics
College of Business Administration
University of Nebraska at Omaha
Omaha, NE 68182