In the previous article, we went over the various forces that cause shifts in demand. The natural question to ask now is “what causes shifts in supply”?
Number of Sellers in Market
In the previous article, we saw that more buyers means higher demand, and fewer buyers means lessened demand. The same holds for sellers – when there is an increased number of sellers in the market, the supply curve will shift to the right: an increase in supply. When there are fewer sellers in the market, the supply curve will shift to the left: a decrease in supply.
When laborers are more productive and the costs of production goes down, producers are able to supply more at the same price. What can do this? Technology! When the assembly line automated much production, the supply curve for many goods shifted to the right – an increase in supply.
Before explaining this one, I need to define a few terms. Capital goods are all the goods that go into the production of the consumer good, the good actually used by the consumer in its final form. A loaf of bread at a grocery store is a consumer good. Technically, you could argue that bread is a capital good that goes into the creation of the final consumer good – a sandwich on a plate on your dinner table. However, for practical purposes, we consider the good at the point of exchange to be the consumer good.
Capital goods are also called goods of higher orders, and consumer goods are sometimes called goods of the first order. A good that is one step from the production of the consumer good is called a good of the second order; a good five steps from the production of the consumer god is called a good of the sixth order – you get the picture.
Now, back to input prices. Capital goods are used to create consumer goods. When the price of the capital goods (inputs) are high, less of the consumer good (output) can be produced. More of a second order good can be produced if the third order goods going into its creation have a low cost. When input prices go down, more of the output is produced – increasing supply and shifting the supply curve to the right. When input prices go up, less of the output is produced – decreasing supply and shifting the supply curve to the left.
Taxes and Subsidies
The last major forces that shift the curves are taxes and subsidies. However, they are applicable to both demand and supply curves and can get a bit confusing. In the next few weeks, we will go over the effect of taxes and subsidies on demand curves. Stay tuned!