Apart from its own price, what makes producers offer more or less of a good?
Identify the factors that shift the supply curve and explain how each changes supply
A clear O-Level answer on the factors that shift supply. How costs of production, technology, taxes and subsidies, the number of firms, weather and the prices of other goods move the whole supply curve.
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What this dot point is asking
The syllabus wants you to identify the factors, other than the good's own price, that affect supply, and to explain how each one shifts the whole supply curve. The big idea is that the supply curve is drawn assuming everything except price stays the same; when one of those other things changes, the whole curve moves left or right.
The answer
Conditions of supply versus price
The supply curve shows how quantity supplied changes as the good's own price changes, holding everything else constant. The other things held constant are the conditions of supply or determinants of supply. When one changes, the whole curve shifts:
- A rightward shift means more is supplied at every price (an increase in supply).
- A leftward shift means less is supplied at every price (a decrease in supply).
Costs of production
The cost of the factors of production, wages, raw materials, rent and so on, is the main determinant. If costs rise, it is dearer to make each unit, so firms supply less at every price and the curve shifts left. If costs fall, supply rises and the curve shifts right.
Technology
Better technology lets firms make more output from the same resources, lowering the cost per unit. This raises supply, shifting the curve right. A new, faster machine or a better farming method are examples.
Indirect taxes and subsidies
The government can change supply directly:
- An indirect tax (such as GST or an excise duty) is an extra cost per unit, so it reduces supply and shifts the curve left, by the amount of the tax.
- A subsidy is a payment to producers per unit, which lowers their effective cost, so it raises supply and shifts the curve right, by the amount of the subsidy.
Number of firms
If more firms enter the market, total supply rises and the curve shifts right. If firms leave the market, supply falls and the curve shifts left.
Weather and natural conditions
For farmed and natural goods, weather matters. Good weather raises the harvest, increasing supply (shift right); a drought, flood or pest reduces it (shift left).
Prices of other goods a firm could make
If a firm can make two goods with the same resources, a rise in the price of one makes it more attractive to produce, so the firm switches resources toward it and supplies less of the other. For example, if the price of wheat rises, a farmer may grow more wheat and less barley, reducing the supply of barley.
Examples in context
Example 1. Weather and vegetable supply. Singapore imports much of its food, so a flood or drought in a supplying country reduces the harvest there and shifts the supply of those vegetables to the left, raising their price in local markets. Supply shocks abroad feed quickly into local prices.
Example 2. A subsidy for solar panels. If the government subsidises the production or installation of solar panels, the effective cost to producers falls, supply rises and the curve shifts right. This is a common way governments encourage more of a good they want, by shifting its supply.
Try this
Cue. Explain how a rise in wages affects the supply of a labour-intensive good. Wages are a cost of production, so higher wages raise the cost of each unit, reduce supply at every price, and shift the supply curve to the left.
Cue. State the effect of a subsidy on the supply curve. A subsidy lowers producers' effective cost per unit, so supply rises and the curve shifts to the right, by the amount of the subsidy.
Cue. Give three determinants that can shift the supply curve. Any three of: costs of production, technology, indirect taxes or subsidies, the number of firms, weather, and the prices of other goods the firm could produce.
Exam-style practice questions
Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Original6 marksExplain, using examples, how a rise in the cost of raw materials and an improvement in technology can each affect the supply of a good.Show worked answer →
A 6 mark question rewards both factors with the correct shift direction and an example.
Rise in cost of raw materials. Raw materials are a cost of production. If they become more expensive, it costs more to make each unit, so firms supply less at every price. The supply curve shifts to the left. For example, dearer flour reduces the supply of bread.
Improvement in technology. Better technology lets firms produce more output from the same resources, lowering the cost per unit. Firms can supply more at every price, so the supply curve shifts to the right. For example, a faster oven lets a bakery make more loaves at lower cost.
Markers reward the correct shift direction for each (costs up shifts supply left, better technology shifts it right) with a clear example for each.
Original5 marksExplain how an increase in an indirect tax on a good and the granting of a subsidy would each affect the supply of that good.Show worked answer →
A 5 mark question rewards both policy effects on supply with the right direction.
Indirect tax. An indirect tax (such as GST or an excise duty) is a cost to the producer for each unit sold. It raises the cost of supplying the good, so firms supply less at every price and the supply curve shifts to the left (upward by the amount of the tax).
Subsidy. A subsidy is a payment from the government to producers for each unit. It lowers the effective cost of supplying the good, so firms supply more at every price and the supply curve shifts to the right (downward by the amount of the subsidy).
Markers reward the tax as a cost shifting supply left and the subsidy as a cost reduction shifting supply right, ideally noting the shift is by the size of the tax or subsidy.
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