Figure 9 illustrates increases in supply by shifts of the supply curve outward and to the right, while moves upward and to the left reflect declines in supply. Along supply curve S0, 500 million books are supplied at $5 per novel. If supply grows to S1, 700 million are supplied at $5. If supply falls to S2, only 300 million books will be offered at $5 each. Thus, an increase in the supply of a good means that more is available at each price; the supply price required for each output level falls. On the other hand, decreases in supply raise supply prices (the minimum required per unit to induce extra production).
Changes in the Supply of Paperback Books
Caution: Supply curve movements may seem confusing; the shift from S0 to S1 is vertically downward even though supply is rising. Always think of leftward horizontal movements away from the price axis as increases (more is available at each price), and rightward shifts toward the price axis as decreases (less is available at each price). This rule also works for shifts of demand curves because quantity is measured along the horizontal axis.
Parallels between our development of supply and earlier discussions of demand may correctly have led you to expect that shifts in supply result from changes in one or more influences on supply. Supply shifts when these influences affect production costs.
Technology encompasses the environment within which resources are transformed into outputs. It includes such influences on production costs as the state of knowledge, the qualities of resources, the legal environment, and such natural phenomena as physical laws (e.g., gravity) and weather. Costs fall and supply grows when technology advances.
Consider innovations in markets for calculators and computers. Massive desktop calculators cost $400 to $2,000 in the 1960s. New technology enabled cheap microchip processors to displace mechanical calculators from the market. Supplies soared and prices fell, so that $4 hand-held calculators are now common, and computer capacity that once would have filled a domed stadium now fits in a briefcase. If transportation technology had advanced as rapidly, you could now drive to Mars and back on a teacup of gasoline.
There are occasions, however, when technology regresses and drives up costs. For example, a plague of locusts might shrivel food output, or a nuclear war could blast us back to the Stone Age. Although technology is hard to quantify, you should be prepared to predict whether a given technological change will boost or inhibit supply.
Supply declines when resource costs rise. Higher wages, rents, interest rates, or prices for raw materials raise costs, squeeze profits, and shrink supplies. For example, higher coal prices raise the cost of steel and reduce incentives to produce. Conversely, falling resource prices stimulate supply. Thus, lower fertilizer prices expand farm outputs.
Prices of Related Producible Goods
Most firms can produce a variety of goods, so changes in the prices of other potential outputs can shift the supply of the current good. Price hikes increase the quantity of a good supplied by using resources that would have been devoted to other types of production. Swimsuit factories might switch to producing wetgear if scuba diving became even more popular and profits grew. The supply of swimwear would fall because its opportunity costs of production (the value of the wetsuits sacrificed by producing swimwear) would rise. Similarly, if corn prices rose, farmers might plant more corn, reducing the soybean supply. These sets of goods are examples of substitutes in production.
On the other hand, when goods are by-products (beef and leather, for example), a rise in the price of one joint product yields an increased supply of the other; their production is complementary. For example, hikes in the price of beef will induce a greater quantity of leather supplied, and the supply of shoes will grow automatically even if their prices fall.
Firms that expect higher output prices in the near future usually increase production quickly. They may also expand their productive capacity by, for example, acquiring new buildings or investing in new equipment and machinery.
Some goods are easily stored, including such durable goods as art and most capital goods. (Durable goods provide benefits across time—a house can provide shelter across decades of use, a stereo can be played constantly for years. In contrast, nondurables such as strawberries are "used up" when consumed.) Producers of storable products who expect prices to rise will try to temporarily stockpile their output, intending to sell their expanded inventories after prices rise. Short-term withholding of products from the market triggers higher prices that, in the longer term, generate larger supplies.
The longer term effect of expectations of rising prices is that supplies of durable goods grow when (a) swollen inventories are sold, and (b) new investments become productive. Such adjustments tend to reduce supply when prices are expected to rise, but if producers' expectations are correct, supply will be larger in the future to partially buffer upward pressures on prices. Conversely, firms may try to liquidate inventories if they expect prices to fall; the short-run supply grows and consumers enjoy lower prices temporarily, but smaller long-run supplies eventually drive up prices.
Adjustments of this type occur regularly when agricultural firms try to time their sales to obtain the highest prices. For example, in 1992, many wheat farmers, anticipating a presidential change that would be more supportive of agriculture, planted more but reduced shipments to the market temporarily. This raised prices for bread and pasta slightly, but prices fell in 1993 when this extra wheat was finally marketed.
Many goods, however, are not easily inventoried. Adjustments to expected price hikes are very different if storage is impossible. For example, a newspaper publisher who expected a booming market to soon justify higher prices could not store news, but would probably increase the supply of newspapers quickly, partially to justify expanding capacity and partially to hook more customers into reading the paper each day.
Other types of expectations also sway production and sales. For example, a steel company may cut current supplies and try to expand output and inventories if it expects a strike. This allows the firm to serve some customers during the strike. Generalizing about how changing expectations affect supply is difficult, however, because these effects vary with the types of expectations, products, and technologies. Usually, though, extraordinary profits in any market will quickly attract a lot of new sellers, boosting supply.
Number of Sellers
More producers generate more output. Thus, as the number of sellers in a particular market increases, the supply also increases (shifts to the right). And vice versa.
Taxes, Subsidies, and Government Regulation
Government policies affect supply as powerfully as they influence demand. From the sellers' vantage point, supply is the relationship between the price received and the units produced and sold. Buyers perceive supply as the relationship between the quantities available and the prices paid. Again, taxes or subsidies cause these prices to differ. In Figure 9, a subsidy to buyers of $1 per book yields no change in the original supply curve (S0) from the perspective of sellers. But buyers would perceive an increase in supply from S0 to Sl, which is the same as a price cut of $1 for every quantity purchased. For example, 500 million paperbacks could now be purchased for a $4 retail price (point b).
Taxes and subsidies provide simple examples of how government policies create differences between sellers' and buyers' supply curves. Regulations may either raise or lower supplies, depending on how they affect production costs. For example, policies to protect the environment drive up costs and reduce supply for production processes that generate pollution (e.g., tanning leather, which fouls water) while reducing costs and increasing the supplies of certain other goods (e.g., fresh fish).
In sum, supply decisions are molded by several influences other than a product's price. Specifically, the supply of a good grows (the curve shifts rightwards) if: (a) costs decline because resource prices fall or technology improves; (b) substitute goods that firms can produce decline in price, (c) the price of a joint product rises; or (d) the number of suppliers increases. Expectations of higher prices normally reduce supplies in the short term and enlarge supplies in a longer term if goods can be inventoried, but results are uncertain for less durable goods. Subsidies tend to expand supply from buyers' perspectives, while taxes tend to shrink supply. Regulation can either decrease or increase supply, depending on whether the specific regulation raises or lowers production costs. The only determinant of supply that does not operate primarily by changing the opportunity costs of production is the number of sellers.