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Figure 1.<\/strong> Shifts in Supply: A Car Example<\/strong>[\/caption]\r\n\r\nPrice<\/strong><\/th>\r\n| Decrease to S1<\/sub><\/strong><\/th>\r\n | Original Quantity Supplied S0<\/sub><\/strong><\/th>\r\n | Increase to S2<\/sub><\/strong><\/th>\r\n<\/tr>\r\n<\/thead>\r\n\r\n | \u00a0$16,000<\/td>\r\n | 10.5 million<\/td>\r\n | 12.0 million<\/td>\r\n | 13.2 million<\/td>\r\n<\/tr>\r\n | $18,000<\/td>\r\n | 13.5 million<\/td>\r\n | 15.0\u00a0million<\/td>\r\n | 16.5\u00a0million<\/td>\r\n<\/tr>\r\n | \u00a0$20,000<\/td>\r\n | 16.5\u00a0million<\/td>\r\n | 18.0 million<\/td>\r\n | 19.8\u00a0million<\/td>\r\n<\/tr>\r\n | $22,000<\/td>\r\n | 18.5\u00a0million<\/td>\r\n | 20.0\u00a0million<\/td>\r\n | 22.0\u00a0million<\/td>\r\n<\/tr>\r\n | $24,000<\/td>\r\n | 19.5\u00a0million<\/td>\r\n | 21.0\u00a0million<\/td>\r\n | 23.1\u00a0million<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n | Impact of Cost Changes in Car Manufacturing<\/h3>\r\nNow, imagine that the price of steel\u2014an important component\u00a0in car manufacturing\u2014rises, so that producing a car\u00a0has become more expensive. At any given price for selling cars, car manufacturers will react by supplying a lower quantity. This can be shown graphically as a leftward shift of supply, from S0<\/sub> to S1<\/sub>, which indicates that at any given price, the quantity supplied decreases. In this example, at a price of $20,000, the quantity supplied decreases from 18 million on the original supply curve (S0<\/sub>) to 16.5 million on the supply curve S1<\/sub>, which is labeled as point L.<\/p>\r\n Conversely, if the price of steel decreases, then producing a car becomes less expensive. At any given price for selling cars, car manufacturers can now expect to earn higher profits, so they will supply a higher quantity. The shift of supply to the right, from S0<\/sub> to S2<\/sub>, means that at all prices, the quantity supplied has increased. In this example, at a price of $20,000, the quantity supplied increases from 18 million on the original supply curve (S0<\/sub>) to 19.8 million on the supply curve S2<\/sub>, which is labeled M.<\/p>\r\n A supply curve shows how quantity supplied will change as the price rises and falls, assuming that no other economically relevant factors are changing. If other factors relevant to supply do change, then the entire supply curve will shift. Just as a shift in demand is represented by a change in the quantity demanded at every price, a shift in supply means a change in the quantity supplied at every price.<\/p>\n Goods and services are produced using combinations of labor, materials, and machinery, or what we call inputs\u00a0(also called\u00a0factors of production). If a business faces lower costs of production, then while the prices for the good or service that the firm produces remain unchanged, a firm’s profits go up. When a firm’s profits increase, it’s more motivated to produce output\u00a0(goods or services), since the more it produces, the more profit it will earn. So, when costs of production fall, a business will tend to supply a larger quantity at any given price for its output. This can be shown by the supply curve shifting to the right.<\/p>\n Consider the supply for cars, shown by curve S0<\/sub> in Figure 1, below. Point J indicates that if the price is $20,000, the quantity supplied will be 18 million cars. If the price rises to $22,000 per car, then the quantity supplied will rise to 20 million cars, as point K on the S0<\/sub> curve shows. The same information can be shown in table form, as in Table 1.<\/p>\n Now, imagine that the price of steel\u2014an important component\u00a0in car manufacturing\u2014rises, so that producing a car\u00a0has become more expensive. At any given price for selling cars, car manufacturers will react by supplying a lower quantity. This can be shown graphically as a leftward shift of supply, from S0<\/sub> to S1<\/sub>, which indicates that at any given price, the quantity supplied decreases. In this example, at a price of $20,000, the quantity supplied decreases from 18 million on the original supply curve (S0<\/sub>) to 16.5 million on the supply curve S1<\/sub>, which is labeled as point L.<\/p>\n Conversely, if the price of steel decreases, then producing a car becomes less expensive. At any given price for selling cars, car manufacturers can now expect to earn higher profits, so they will supply a higher quantity. The shift of supply to the right, from S0<\/sub> to S2<\/sub>, means that at all prices, the quantity supplied has increased. In this example, at a price of $20,000, the quantity supplied increases from 18 million on the original supply curve (S0<\/sub>) to 19.8 million on the supply curve S2<\/sub>, which is labeled M.<\/p>\n |
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