What this lesson teaches
I can explain and draw increases and decreases in supply as shifts of the curve.
Syllabus K343, 2.3.3. Shifts of a supply curve: causes of decreases and increases in supply; diagrams that illustrate shifts of a supply curve
Make a guess
Workers at a factory get a pay rise but produce no more per hour. What happens to the factory's supply?
- It decreases, because each unit now costs more to make.
- It increases, because better-paid workers are happier.
- Supply stays the same, because the selling price is the same.
Show the answer
It decreases, because each unit now costs more to make.
Higher wages raise costs. With the same output per hour, each unit is dearer to produce, so supply shifts left.
Changes in costs, technology, weather, the number of firms, and taxes or subsidies shift the supply curve.
The supply curve shifts when a non-price factor changes. An increase in supply shifts the curve right: more is supplied at every price. A decrease shifts it left.
Costs of production: if wages, rent or raw material prices rise, each unit costs more to make, so supply decreases. Productivity and technology: if workers or machines produce more per hour, costs fall and supply increases.
Weather and natural events matter for farming and fishing. A drought decreases the supply of crops. The number of firms matters too: more firms entering a market increases supply.
Government: an indirect tax, such as a tax on each unit sold, raises firms' costs and decreases supply. A subsidy to producers lowers costs and increases supply.
- Increase in supply
- Supply curve shifts right: more supplied at every price.
- Costs of production
- Higher costs decrease supply; lower costs increase it.
- Indirect tax
- Raises costs, so supply decreases.
- Producer subsidy
- Lowers costs, so supply increases.
Worked example: Classifying causes for a supply shift
A question asks what could shift the supply of electric scooters to the left.
- Rising cost: the price of lithium for batteries rises, so each scooter costs more to make.
- Fewer sellers: two scooter makers leave the market.
- Government: a new tax is placed on each scooter sold.
- In each case less is supplied at every price, so S shifts left.
Watch out for this
Higher wages make workers more productive, so supply increases.
Higher wages are a rise in costs, which decreases supply. Supply increases when productivity rises, so that each unit costs less to make.
Check your understanding
Which change would increase the supply of rice?
- Farmers start using a new, higher-yielding seed.
- The government taxes each kilogram of rice sold.
- Wages for farm workers rise.
Show the answer
Farmers start using a new, higher-yielding seed.
Right. Higher productivity lowers the cost of each kilogram, so supply shifts right.
Check your understanding
Which change causes a movement along the supply curve of chicken rice, rather than a shift of it?
- A new tax on each plate sold
- A new rice cooker that cooks faster
- A rise in the price of chicken
- A rise in the price of chicken rice
Show the answer
A rise in the price of chicken rice
Right. A change in the good's own price moves along its supply curve.