What factors change supply?

Postado 2023-06-29 19:45:47

12KB

Key points

Supply curve shift: Changes in production cost and related factors can cause an entire supply curve to shift right or left. This causes a higher or lower quantity to be supplied at a given price.
The ceteris paribus assumption: Supply curves relate prices and quantities supplied assuming no other factors change. This is called the ceteris paribus assumption. This article talks about what happens when other factors aren't held constant.

The ceteris paribus assumption

A demand curve or a supply curve is a relationship between two, and only two, variables: quantity on the horizontal axis and price on the vertical axis. The assumption behind a demand curve or a supply curve is that no relevant economic factors, other than the product’s price, are changing. Economists call this assumption ceteris paribus, a Latin phrase meaning “other things being equal”. If all else is not held equal, then the laws of supply and demand will not necessarily hold. The rest of article talks about what happens when other factors aren't held constant.

How production costs affect supply

A supply curve shows how quantity supplied will change as the price rises and falls, assuming ceteris paribus—no other economically relevant factors are changing. If other factors relevant to supply do change, then the entire supply curve will shift. A shift in supply means a change in the quantity supplied at every price.

Say we have an initial supply curve for a certain kind of car. Now imagine that the price of steel—an important ingredient in manufacturing cars—rises so that producing a car becomes more expensive.