Question

What kinds of changes in underlying conditions can cause the supply curve to shift? Give some examples and explain the direction in which the curve shifts.

Answer 1

Changes in the cost of production and related factors may cause a complete supply curve to change from right to left. It leads to a supply of a higher or lower quantity at a given price.
The principle of ceteris paribus: supply curves correspond to supplied prices and quantities if no other factors change. This is called the presumption of ceteris paribus.

A supply curve indicates how the supplied quantity will change as prices rise and fall, assuming ceteris paribus— no other economically important variables change. If other demand-related factors change, the entire supply curve can change. A supply shift means a change in the supplied quantity at any cost. In 2014, the Northeastern China Manchurian Plain which produces most of the country's wheat, maize, and soybeans was experiencing its most severe drought in 50 years. A drought reduces the supply of agricultural products, meaning a lower quantity will be delivered at any given price. In contrast, particularly good weather would shift the supply curve to the right.

The supply curve will also shift to the right when a company discovers a new technology that allows it to produce at a lower cost. For example, for simple crops such as wheat and rice, a major scientific initiative in the 1960scalled the Green Revolution centered on breeding improved seeds. By the early 1990s, with these seeds from the Green Revolution, more than two-thirds of wheat and rice were grown in low-income countries around the world— and the harvest was twice as high per acre. An improvement in technology that reduces production costs will shift supply to the right, causing a larger quantity to be produced at any given price.

Through means of taxation, legislation and subsidies, government policies may influence production costs and the supply curve. For example, a tax on alcoholic beverages is imposed by the U.S. government, which collects about $8 billion per year from producers. Taxes are treated by companies as costs. For the reasons mentioned above, higher costs decrease demand. Another example of cost-effective policy is the wide range of government regulations that require businesses to spend money to provide a cleaner environment or a healthy workplace; compliance with regulations increases costs.

On the other hand, a government subsidy is the opposite of a levy. A subsidy happens when a company is paid directly by the government and taxes are lowered by the firm if certain activities are carried out by the firm. Taxes or regulations are, from the company's perspective, an additional cost of production that shifts supply to the left, leading the company to produce a lower amount at any given price. Nevertheless, government subsidies decrease production costs and increase demand at any given price, moving supply to the right.