Question

What are the determinants of supply? What happens to the supply curve when any of these determinants change? Distinguish between a change in supply and a change in the quantity supplied, noting the cause(s) of each.

Short answer

The supply determinants are given as follows:

• Price of inputs

• Taxes and subsidies

• Price of other goods

• Producers’ expectations

• Technology

• Number of sellers

A change in the determinants will shift the supply curve.

Change in supply refers to a shift in the supply curve due to the influence of the supply shifters, whereas a change in quantity supplied is the movement along the supply curve due to a change in the price of the good, keeping other factors constant.

Step-by-step solution

Determinants of supply

The supply shifters/determinants change the supply of a good or service. These are as follows:

Price of inputs: A higher input cost will increase the cost of production and will reduce the supply, whereas a lower input cost will increase the supply.

Taxes and subsidies: Taxes discourage supply by reducing sellers’ prices, and subsidies encourage the supply of a good.

Price of other goods: An increase in the price of other goods will shift the production assets to their production, and the supply of the concerned good will decrease. Similarly, a decrease in the price of other goods will shift the resources to the production of the concerned good, and the supply will increase.

Technology: Technology advancement increases productivity and supply at the same level of inputs, and deterioration will decrease the supply.

Producers’ expectation: An expectation of a higher price reduces the current supply as producers want to take advantage of increased prices in the future. An expectation of lower prices will encourage supply at present.

Number of sellers: An increase in the number of sellers of a good will increase its supply, causing a forward shift in the supply curve. A decrease will lead to a backward shift.

Effect on the supply curve with the changes in determinants

The supply curve shifts forward with an increase in supply. This can be caused by technological advancement, an increase in the number of sellers, a reduction in input prices, a lower price expectation for the future, lower prices of other goods, or provision of subsidies.

The supply curve shifts backward with a decrease in supply. This can be caused by technological deterioration, a decrease in the number of sellers, an increase in input prices, a higher price expectation for the future, higher prices of other goods, or tax imposition.

Change in supply vs. change in quantity supplied

The change in supply means supply shifters are affecting the supply curve leading to a backward or forward shift in the curve. The price of the good is constant. For example, a decrease in capital input cost will shift the supply curve forward.

A change in quantity supplied means the price is affecting the supply curve leading to an upward or downward movement along the curve. The determinants of supply are constant. For example, an increase in the price of phones leads to an upward movement along the supply curve of phones.