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movement along the supply curve and shifts in supply curves

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Supply Curve: Movements and Shifts

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There is a difference between what causes a shift or a movement along the supply curve. It is important to know the difference between them.

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The key difference:

A shift in the supply curve means that at the exact same price, producers are willing to supply more or less of a good due to factors other than the price of the good.

A movement along the supply curve occurs following a change in price, showing how the quantity supplied changes as the price changes.

Movement along the supply curve

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Key Point: Only a change in price causes a movement along the supply curve. A change in price does not shift the supply curve. We just move from one point on the supply curve to another.

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Example Scenario: Movement Along the Supply Curve

Initial Market Condition:

🍏 The current price of apples is £2 per lb.
🚜 At this price, Farmer A is willing to supply 100 pounds of apples.

Price Increase:

Say the price of apples increases to £3 per lb.
📈 The increase in quantity supplied due to an increase in the price of the product is known as the expansion of supply. When the price of a product rises and other factors affecting supply remain the same, it leads to an expansion of supply.
📊 At the new price of £3 per lb, Farmer A is now willing to supply 160 lb of apples.

Price Decrease:

Say the price of apples reduces to £1 per lb.
📉The decrease in quantity supplied due to an decrease in the price of the product is known as the contraction of supply. When the price of a product fall and other factors affecting supply remain the same, it leads to an contraction of supply.
📊 At the new price of £1 per lb, Farmer A is now willing to supply 40 lb of apples.

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It is important to REMEMBER that there is a profit seeking motivation behind this. When prices increase, suppliers want to sell more because they can make higher profits per unit sold. This motivates them to increase their supply.

Conversely, if prices decrease, suppliers may supply less because they earn less per unit sold. In both cases, profit is the key factor driving suppliers' decisions.

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Exam Tip: If given a scenario and asked to explain it using a relevant supply curve, look for whether there is a mention of an “increase/decrease in price” of a specific good, which indicates a movement along the supply curve.

If the scenario describes changes in factors other than the price (e.g., technology, input costs, number of producers), this indicates a shift in the supply curve.

Causes of Shifts in Supply Curves

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Key Point: A shift in the supply curve occurs when, even at the SAME PRICE, consumers are willing to supply a higher or lower quantity of goods.

Definition: Determinants of supply are changes in conditions that cause the supply curve to shift either to the left or right.

let’s explore how these determinants of supply can shift the supply curve to the right:

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Supply curve shifting to the right implies that, at the same price levels, producers are now willing to supply more of the good or service than before. This indicates an increase in supply.

Note that the price has not changed. Remember a change in price does not shift the supply curve. Only the determinants of supply can shift the supply curve.

Determinants of supply and shifting right the supply curve:

📉 Cost of Factors of Production: If the cost of production falls, supply will increase. For example, if the price of steel drops, car manufacturers can produce more cars at a lower cost.
🔧 Technology: New technology will increase the supply of a product. For example, automation in factories allows manufacturers to produce more electronics efficiently.
🌞 Weather: Good weather increases the output of agricultural products. For example, a favorable growing season results in a bumper crop of wheat.
💸 Taxes: If taxes are imposed on imported goods, domestic firms will be encouraged to increase supply. For example, tariffs on foreign steel may lead domestic steel producers to ramp up production.
🎁 Subsidies: Payment of subsidies or grants encourages firms to increase supply. For example, government subsidies for renewable energy projects boost the production of solar panels.
🔄 Prices of Substitute Goods: If the prices of substitute goods increase, firms may divert resources to produce the higher-priced goods. For example, if the price of soybeans rises, farmers may plant more soybeans instead of corn.
🔮 Expectations of Price Changes: If producers expect prices to rise in the future, they might increase current production. For example, if oil producers expect higher future oil prices, they might pump more oil now.
🔗 Goods in Joint Supply: An increase in the supply of one good will lead to an increased supply of its by-product. For example, increased beef production also boosts the supply of leather.

let’s explore how these determinants of supply can shift the supply curve to the left:

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Supply curve shifting to the left implies that, at the same price levels, producers are now willing to supply less of the good or service than before. This indicates an decrease in supply.

Determinants of supply and shifting left the supply curve:

📈 Cost of Factors of Production: If the cost of production rises, supply will decrease. For example, if the price of crude oil increases, the cost of producing plastic products rises, reducing supply.
🛠️ Technology: Outdated or failing technology can decrease the supply of a product. For example, a breakdown in machinery can reduce the production capacity of a factory.
🌩️ Weather: Poor weather can decrease the output of agricultural products. For example, a drought can significantly reduce the supply of corn.
💰 Taxes: Higher taxes on production can decrease supply. For example, an increase in corporate taxes may lead manufacturers to cut back on production.
🚫 Subsidies: Removal or reduction of subsidies can decrease supply. For example, if the government removes subsidies for electric vehicles, the supply of electric cars may decrease.
🔀 Prices of Substitute Goods: If the prices of substitute goods decrease, firms may shift resources away, reducing the supply of the original goods. For example, if the price of cotton drops, textile companies might produce less synthetic fabric.
🔮 Expectations of Price Changes: If producers expect prices to fall in the future, they might reduce current production. For example, if farmers expect the price of wheat to drop, they might plant less wheat now.
🛑 Goods in Joint Supply: A decrease in the supply of one good can lead to a decreased supply of its by-product. For example, a reduction in crude oil extraction can also reduce the supply of petroleum by-products like gasoline.

Test Your Knowledge with Scenarios

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Exam Tip: In your higher economics exam, you may encounter real-life case study scenarios where there may be questions asking you to draw diagrams illustrating the market effects for specific goods.

These questions will test your ability to understand and analyse shifts in supply curves. Pay close attention to the details provided in the case study.

Practice drawing supply curves for scenarios like the ones below to prepare effectively 👇

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Scenario 1

Situation: A technological breakthrough has improved the efficiency of wheat farming, allowing farmers to produce more wheat at a lower cost.

Question: "Draw a diagram to show the effect on the supply of wheat due to the technological advancement."

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😃 Try it for yourself then click here to see the answers:

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Scenario 2

Situation: A significant increase in the price of natural gas makes it a more profitable alternative for energy companies, leading them to divert resources away from coal production to natural gas extraction.

Question: "Draw a diagram to show the effect on the supply of coal due to the increased profitability of natural gas."

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😃 Try it for yourself then click here to see the answers:

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Scenario 3

Situation: Due to increased consumer demand, the price of handmade candles rises significantly.

Question: "Draw a diagram to show the effect on the quantity supplied of handmade candles as a result of the price increase."

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😃 Try it for yourself then click here to see the answers:

Knowledge checkpoint: Answer these actual Higher Economics exam questions:

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Describe factors which increase the supply of a product. (Worth 4 marks)