The supply curve shows how much of a good or service sellers are willing to sell at any given price. However, it is not constant over time. Whenever a change in supply occurs, the supply curve shifts left or right (similar to shifts in the demand curve). An increase in supply results in an outward shift of the supply curve (i.e. to the right), whereas a decrease in supply results in an inward shift (i.e. to the left). There are a number of factors that cause a shift in the supply curve: input prices, number of sellers, technology, natural and social factors, as well as expectations. We will look at each of them in more detail below.
Firms use a number of different inputs to produce any kind of good or service (i.e. output). When the prices of those inputs increase, the firms face higher production costs. As a result, producing said good or service becomes less profitable and firms will reduce supply. That is, the supply curve shifts to the left (i.e. inward). By contrast, a decrease in input prices reduces production costs and therefore shifts the supply curve to the right (i.e. outward).
For example, your favorite restaurant needs several ingredients to make a burger: buns, meat, lettuce, tomatoes, BBQ sauce, and so on. Now, imagine the price of meat increases. That means, the restaurant faces higher costs for every burger it produces. If the price of the burger remains the same, this results in a smaller profit for the restaurant. Because of this, the restaurant will produce less burgers and focus on other dishes that are more profitable. Therefore supply of burgers decreases, as the price of meat increases.
If the price of meat increases a lot, some restaurants may even decide to shut down and go out of business, because they cannot earn profits anymore. This reduces supply even further. By contrast, if the price of meat decrease, it becomes more attractive to sell burgers, which results in an increase in supply. Hence, supply is negatively correlated to the price of the inputs used in production.
Number of Sellers
The number of sellers in a market has a significant impact on supply. When more firms enter a market to sell a specific good or service, supply increases. That is, the supply curve shifts to the right. Meanwhile, when firms exit the market, supply decreases, i.e. the supply curve shifts to the left. This may seem pretty obvious, but nevertheless, it is an important factor to keep in mind.
To give an example, let’s say there is only one burger restaurant in the entire economy. We’ll call it First Burger. Demand for burgers is high, so First Burger already produces as many burgers as possible. In this scenario, total supply of burgers in the economy is equal to First Burger’s supply. Now a new burger restaurant opens nearby – Second Burger. This results in an increase in total supply of burgers in the economy, which is now equal to the sum First Burger’s and Second Burger’s individual supply.
The use of advanced technology in the production process increases productivity, which makes the production of goods or services more profitable. As a result, the supply curve shifts right, i.e. supply increases. Please note that technology in the context of the production process usually only causes an increase in supply, but not a decrease. The reason for this is simple: new technology is only adopted if it increases productivity. Otherwise, sellers can just stick with the technology they already have, which does not affect productivity (and thus supply).
For example, the highly standardized and technologically advanced processes used in many fast food burger restaurants significantly increased productivity and as a result the supply of burgers all over the world. Of course, the restaurants have no incentive to alter those processes, unless they can be made even more efficient.
Natural and Social Factors
There are always a number of natural and social factors that affect supply. They can either affect how much output sellers can produce or how much they want to produce. Whenever one of those factors causes supply to decrease, the supply curve shifts to the left, whereas an increase in supply results in a shift to the right. As a rule of thumb, natural factors generally affect how much sellers can produce, while social factors have a greater effect on how much they want to produce.
Examples of natural factors that affect supply include natural disasters, pestilence, diseases, or extreme weather conditions. Basically anything that can have an effect on inputs or facilities that are required in the production process. Meanwhile, examples of social factors include an increased demand for organic products, waste disposal requirements, minimum wage laws, or government taxes. Note that not all of those factors necessarily have an impact on the cost of production, but all of them affect production decisions.
Last but not least, seller’s expectations of the future have a significant impact on supply. Or more specifically, their expectations of future prices and/or other factors that affect supply. If they expect prices to increase in the near future, they will hold some of their output back (i.e. reduce current supply) in order to increase supply in the future, when it becomes more profitable.
For example, let’s say there’s going to be a huge annual country festival in town next week. During the festival, demand for burgers spikes significantly every year, which usually increases prices by a few dollars. Therefore, First Burger restaurant decides to keep some of this weeks ingredients in the store room and use them to make some additional burgers during the festival.
In a Nutshell
Supply is not constant over time. It constantly increases or decreases. Whenever a change in supply occurs, the supply curve shifts left or right. There are a number of factors that cause a shift in the supply curve: input prices, number of sellers, technology, natural and social factors, and expectations.