Change In Supply

From CEOpedia | Management online

Change in supply is an economic term which means a shift in the supply curve, caused by a change in any variable other than the own price (Piros C.D. and others 2013, p. 12). There are two possibilities for shifting the supply curve. Shifting the supply curve to the right means an increase in supply, while shifting to the left means a decrease in supply (Sexton L.R. 2018, p. 112).

A change in quantity supplied vs. a change in supply

The difference between a change in supply of quantity and a change in supply is that the change in supply of quantity applies to movement along the supply curve and depends only on one factor, which is the change in own price, while the change in supply refers to a shift in the supply curve to the right or left and can be caused by many factors, such as government restrictions, technology or number of sellers (Arnold A.R. 2014, p. 72).

Factors affecting supply change

Key determinants that affect the change in supply are:

  • The prices of raw materials have a direct impact on production costs. A reduction in the price of raw materials will make production cheaper and companies will be willing to supply more at any price of the product. A decrease in the price of raw materials will increase supply and shift the supply curve to the right, while an increase in the price of raw materials will reduce supply and shift the supply curve to the left (Hoskins C. and others 2004, p. 50).
  • Technology - the change in technology will result that products will be produced in a better, faster and more effective way, this will reduce production costs by allowing a given level of output to be produced using less input than before, causing in a shift of supply curve to the right (Hoskins C. and others 2004, p. 50-51).
  • Number of suppliers - increasing the number of companies on the market will cause that the short-term supply curve will shift to the right, as, the number of companies increases, more products will be supplied (Hoskins C. and others 2004, p. 51).
  • Expectations of future price - if producers predict that the price of a given product may increase in the future, they may reduce the supply of that product, for example by stopping or reducing production (Arnold A.R. 2014, p. 81)
  • Prices of other goods - an increase/decrease in the price of a given good may result in decrease/increase in another good (Arnold A.R. 2014, p. 81)

Examples of Change In Supply

  • Change in production costs: A change in production costs, such as the cost of labor or materials, will cause a shift in the supply curve. For example, if the cost of labor in the production of a good increases, then the supply of the good will decrease, and the supply curve will shift to the left.
  • Change in technology: Improvements in technology can also lead to a change in supply. An example of this is the development of new machinery or processes that allow for more efficient production of a good. This will result in an increase in the supply of the good, and the supply curve will shift to the right.
  • Change in taxes: Changes in taxes can also cause a shift in the supply curve. For instance, if the government introduces new taxes on a good, then the supply of the good will decrease, and the supply curve will shift to the left.
  • Change in number of suppliers: A change in the number of suppliers in the market will also cause a shift in the supply curve. For example, if a new supplier enters the market, then the supply of the good will increase, and the supply curve will shift to the right.

Advantages of Change In Supply

Change in supply can bring a number of advantages to the market. Specifically, it can:

  • Increase the availability of goods and services, allowing consumers to purchase them at lower prices. This can help stimulate consumption and economic activity.
  • Make it easier for producers to introduce new products or services to the market, thus increasing competition and helping to keep prices low.
  • Help to maintain equilibrium in the market, as a shift in supply can help adjust prices to meet the demand of the consumers.
  • Encourage the production of goods and services that are most in demand, thereby providing greater economic efficiency.
  • Increase the overall economic growth of the country, as more goods and services can now be produced and consumed.

Limitations of Change In Supply

Change in supply can be a powerful tool to help manage economic fluctuations, but it also has its limitations. These include:

  • The inability to accurately predict changes in demand. While changes in supply can help to meet increased demand in the short-term, it is difficult to accurately forecast what changes in demand will be seen in the long-term, making it difficult to plan ahead.
  • The difficulty of changing production levels in response to shifts in supply. It can take a significant amount of time, resources, and money to make changes to a company’s production level in response to changes in supply.
  • Inelasticity of certain markets. Some markets can be very inelastic, meaning that changes in supply may not have an effect on demand. This can make it difficult to use supply changes to manage economic activity in some markets.
  • Supply shocks. Changes in supply can be difficult to predict and can often lead to sudden price fluctuations which can be difficult to manage.

Other approaches related to Change In Supply

A change in supply can be caused by many different external influences. These influences can be separated into three categories: changes in the cost of production, changes in the number of producers entering or exiting the market, and changes in expectations.

  • Changes in the Cost of Production: Variables such as the cost of labor, the cost of raw materials, taxes, and subsidies can all affect the cost of producing a good or service, resulting in a change in supply.
  • Changes in the Number of Producers Entering or Exiting the Market: If more producers enter the market, it will increase the total supply of the good or service, while if producers leave the market, it will decrease the total supply.
  • Changes in Expectations: If the public’s expectations about the future change, this can affect the supply of a good or service. For example, if people expect the price of a good or service to increase in the future, they may increase their current production of the good or service in order to take advantage of the higher prices.

In summary, a change in supply can be caused by many different factors, including changes in the cost of production, changes in the number of producers entering or exiting the market, and changes in expectations.


Change In Supply — recommended articles
Factors affecting supply — Supply shock — Short run aggregate supply curve — Decreasing cost industry — Supply curve — Law of supply and demand — Factors affecting demand — Monopson — Structural inflation

References

Author: Natalia Węgrzyn

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