2.4: Variables that Shift the Supply Schedule
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To recap, market supply reflects the actions of individual firms seeking to maximize their profit. These actions include entry into the market, exit from the market, and profit maximizing quantity choices once firms are in the market. With this in mind, anything that affects profitability aside from the product’s own market price will shift the supply schedule. Let us summarize some of these factors here.
First, anything that affects production cost will affect supply.
- Input prices. Other things equal, an increase in the price of an input will shift the supply schedule inwards (decrease in supply). Conversely, a decrease in the price of an input will shift the supply curve outwards (increase supply)
- Available production technology. Other things equal, as production technology improves, the cost of converting inputs into outputs declines and this will shift the supply schedule outwards (increase in supply).
Second, anything that affects the opportunity cost of factors of production will affect supply. These include:
- Prices of competing products. In most cases, inputs that are being employed to produce one product might be used alternatively to produce other products. For example, inputs such as land, machinery, labor, and management of a farm operator could conceivably be used to grow corn or beans. By producing a corn crop, the producer gives up the opportunity of using the inputs for a soybean crop. If the price of soybeans were to increase, the value of the alternative opportunity (a soybean crop as opposed to a corn crop) would increase. In this example, the returns that could be obtained by growing soybeans is the opportunity cost of raising corn. If returns from growing soybeans rise relative to corn, the market supply for corn will shift inwards (to the left). This is because producers devote more of their factors of production to the (now more profitable) alternative opportunity. In this example, corn and soybeans can be termed competing products in that they compete for the same inputs.
- Prices of joint products. In some cases, production involves joint outputs. This occurs when two distinct products are produced simultaneously, as is the case when production of one commodity generates a marketable byproduct. More generally, joint products result from situations where two or more different outputs can be more cheaply produced within a diversified firm because of complementarity in the production process. For example, a wheat producer might also bale and market straw; a cotton producer is simultaneously growing fiber and cotton seed; and most broiler growers run cow-calf operations. In these kinds of situations, the price of a joint output could shift supply of the other. For example, low cotton prices would result in producers transferring land and productive resources out of cotton production and into other activities. This would reduce the supply of cottonseed.
- Production risk. The risk of an activity also affects its opportunity cost. As the risk inherent in an activity declines, the returns required to attract producers to that activity will decline as well. Advances in production technology often impact the risk of production as well as the efficiency by which inputs are converted into an output. Hence, technological changes can affect supply through their impact on the cost function and by their impact on the opportunity cost of production.
Finally, the supply schedule may shift due to shocks and random factors that disrupt or augment supply. Weather conditions during key parts of the growing season are important to markets because these affect the supply of crops. An outbreak of an epizootic disease or resolution thereof would similarly affect supply of animal products. In many markets, political upheaval, regulatory changes, labor disruptions or similar social events affect access to supplies and production risk.
Demonstration \(\PageIndex{1}\): Inverse supply and supply shift variables.