Other Factors That Affect Supply 

In the example above, we saw that changes in the prices of inputs in the production process will affect the cost of production, and thus the supply. Several other things affect the cost of production, too, such as changes in weather or other natural conditions, new technologies for production, and some government policies.

Changes in Natural Conditions

The cost of production for many agricultural products will be affected by changes in natural conditions. For example, continuing drought in 2022 resulted in 395,000 acres in California, an area larger than Los Angeles, being left unplanted.^[1] The rice harvest is half of what it would be in a normal year without drought.^[2] A drought decreases the supply of agricultural products, which means that at any given price, a lower quantity will be supplied which shifts the supply curve to the left. Conversely, especially good weather that leads to better growth and larger harvests would shift the supply curve to the right.

Changes in Technology

When new technology allows businesses to produce at a lower cost, the supply curve will shift to the right, as well. For example, every year since 1965, the number of transistors on a computer chip has doubled while the transistors have become much smaller. This innovation means that computers have become faster, smaller, and cheaper.^[3] A technological improvement that reduces costs of production will shift supply to the right, so that a greater quantity will be produced at any given price.

Changes in Government Policies or Laws

Government policies can affect the cost of production and the supply curve through taxes, regulations, and subsidies. For example, the U.S. government imposes a tax on alcoholic beverages that collects about $10 billion per year from producers.^[4] Taxes are treated as costs by businesses. Higher costs decrease supply for the reasons discussed above. Other examples of policy that can affect cost are the wide array of government regulations that require firms to spend money to provide a cleaner environment or a safer workplace; complying with regulations increases costs.

A government subsidy, on the other hand, is the opposite of a tax. A subsidy occurs when the government pays a firm directly or reduces the firm’s taxes if the firm carries out certain actions. From the firm’s perspective, taxes or regulations are an additional cost of production that shifts supply to the left, leading the firm to produce a lower quantity at every given price. Government subsidies reduce the cost of production and increase supply at every given price, shifting supply to the right.

Simulation: Supply of Food Trucks

Play the simulation below multiple times to see how different choices lead to different outcomes. All simulations allow unlimited attempts, so that you can gain experience applying the concepts.

 

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