📈 Costs rise
A pottery firm has to pay more for electricity to run its kilns. Making mugs is less profitable, so it supplies fewer mugs at each price. Supply shifts left.
Demand, Supply and Equilibrium » What Shifts the Supply Curve
What you'll learn this session
Study time: 30 minutes
Edexcel spec: 1.1.3 (f)
- Why a change in something other than price shifts the whole supply curve
- Five factors that shift supply: costs of production, technology, indirect taxes, subsidies and natural factors
- Which way the curve shifts for each factor, with examples
- How to describe the shift on a diagram in the exam
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Unlock This CourseWhy the supply curve shifts
This topic is examined on Paper 1 (Microeconomics and Business Economics). Remember from Supply and the Supply Curve that a change in the good's own price causes a movement along the curve. Everything else that affects how much firms can supply is different. If something other than the good's own price changes, producers offer a different quantity at every price. The whole curve moves.
- A shift to the right means more is supplied at every price. This is an increase in supply.
- A shift to the left means less is supplied at every price. This is a decrease in supply.
The spec names five factors you must know. Most of them work by changing how costly it is to produce. Let us take them one at a time.
Costs of production
Firms pay for things such as wages, raw materials, energy and rent. When these costs rise, each unit is less profitable to make, so firms supply less at every price. Supply decreases and the curve shifts left. When costs fall, producing becomes more profitable, so supply increases and the curve shifts right.
📉 Costs fall
The price of flour falls. A pasta maker can now produce more at the same price. Supply shifts right.
Key terms:
- Costs of production: the money firms spend to make goods and services, such as wages, raw materials, energy and rent.
Changes in technology
Robots cut the cost of making each car, so supply increases and the curve shifts right
Technology is the machinery, equipment and methods used to produce goods. Better technology usually lets firms make more output with the same inputs, or the same output at lower cost. Supply increases and the curve shifts right. Car factories that use robots to weld and assemble parts can make more cars in a day than workers using only hand tools.
Technology does not always help at once. A firm may need to pay for new machines and train staff first. In the exam, the usual answer is that improved technology shifts supply to the right.
Key terms:
- Technology: the machinery, equipment and methods used to produce goods and services.
Indirect taxes
An indirect tax is a tax on spending, charged on goods and services. The seller collects it and passes it to the government. In the UK, VAT and the duty on petrol are examples. For the firm, the tax works like an extra cost on every unit sold. So when an indirect tax is introduced or increased, supply decreases and the curve shifts left. When an indirect tax is cut or removed, supply increases and the curve shifts right.
Why the government uses taxes as a policy, and their pros and cons, comes later in Government Policies for Externalities. Here you only need to know the effect on the supply curve.
Key terms:
- Indirect tax: a tax on spending on goods and services, collected by sellers and paid to the government.
Subsidies
A subsidy is a payment from the government to producers. It lowers the firm's costs for each unit it produces. A subsidy therefore makes supply increase, and the curve shifts right. If a subsidy is reduced or taken away, supply decreases and the curve shifts left.
Notice that subsidies are the opposite of indirect taxes. A tax pushes supply left. A subsidy pushes supply right. The use of subsidies in trade is covered later in Tariffs, Quotas and Subsidies.
Key terms:
- Subsidy: a payment from the government to producers that lowers their costs and encourages them to produce more.
Natural factors
A drought can wipe out a harvest: less is supplied at every price and the supply curve shifts left
Some goods depend on nature. Natural factors include weather and natural disasters. Farming is the clearest case.
- Good weather and a good growing season mean a bigger harvest. Supply increases and the curve shifts right.
- A drought, flood or frost can destroy crops. Supply decreases and the curve shifts left.
- A natural disaster such as an earthquake or hurricane can damage factories, farms and transport links. Firms cannot produce as much, so supply decreases.
Key terms:
- Natural factors: events in nature, such as weather and natural disasters, that change how much firms can produce.
Summary table
| Factor | Change | Effect on supply | Curve shifts |
|---|---|---|---|
| Costs of production | Rise | Decreases | Left |
| Costs of production | Fall | Increases | Right |
| Technology | Improves | Increases | Right |
| Indirect tax | Introduced or raised | Decreases | Left |
| Indirect tax | Cut or removed | Increases | Right |
| Subsidy | Introduced or raised | Increases | Right |
| Subsidy | Cut or removed | Decreases | Left |
| Natural factors | Good weather | Increases | Right |
| Natural factors | Drought, flood or disaster | Decreases | Left |
How to show it on a diagram
You cannot draw in this lesson, but you must be able to in the exam. Follow these steps:
- Draw the axes. Label the vertical axis Price and the horizontal axis Quantity.
- Draw an upward-sloping line and label it S.
- Draw a second line to the right of S for an increase in supply, or to the left for a decrease. Label it S1.
- Add an arrow between the two curves to show the direction of the shift.
Do not just slide along S. The good's own price has not changed. Only the factor you are explaining has moved the curve.
Worked example
A farm grows wheat. This year there is a long drought, so the harvest is small. The farm can supply less wheat at every price. Supply decreases and S shifts left to S1. Next year the weather is good and the farm also receives a subsidy. Both factors increase supply, so the curve shifts right.
Common mistakes
- Writing that a fall in the good's own price shifts the supply curve. It does not. That is a movement along the curve.
- Mixing up taxes and subsidies. An indirect tax raises costs and shifts supply left. A subsidy lowers costs and shifts supply right.
- Forgetting to say which way the curve shifts. Always write left or right, and increase or decrease.
- Mixing up supply and demand. A drought shifts the supply curve, not the demand curve.
Exam-style question
Marlow is a small country that grows oranges and makes orange juice. Last year a hurricane damaged many orange farms. This year the government gives a payment to every juice producer for each carton made.
(a) State two factors, other than price, that could shift the supply curve of orange juice. [2 marks]
(b) Explain how the hurricane may affect the supply of oranges. [3 marks]
(c) Analyse how the payment from the government may affect the supply of orange juice. [4 marks]
Model answer
(a) Any two of: costs of production (1), changes in technology (1), indirect taxes (1), subsidies (1), natural factors such as weather or natural disasters (1).
(b) A hurricane is a natural disaster (1). It damaged the farms, so farmers can grow fewer oranges (1). Supply decreases and the supply curve shifts to the left (1).
(c) The payment is a subsidy (1). It lowers the producers' costs for each carton made (1). Producers can now supply more juice at each price because it is more profitable (1). Supply increases and the curve shifts right from S to S1 (1).
Exam tip
In part (c), the word Analyse asks for a chain of reasoning. Name the factor (subsidy), say what it does to costs, then say what happens to supply and which way the curve moves.