Shifts of supply

Shifts of supply

When the ceteris paribus condition is relaxed, the whole supply curve will move if any of the following factors change

Cost of production Price of related products State of technology

Cost of Production

An increase in the cost of production will move the Supply curve in towards the left.

SS1P

q

P

q1q2

An increase in the cost of production may be caused by

wage increasing increases in the cost of raw materials, increases in compliance costs such as the need to use

safety equipment, holiday pay entitlements, fines, sales tax etc.

A decrease in the cost of production will move the supply curve out to the right

S

S1

P

Q

P

q1 q2

A decrease in the cost of production may result from a fall in real wages, cheaper raw materials such as oil at the moment, or cheaper compliance costs. An example of cheaper compliance costs is the

current Government looking at ways to simplify the Resource Management Act.

Price of Related Goods

A related good (or service) is one that can be produced using the same resources e.g. pancake or pikelet.

Can you think of any other examples?

An increase in the price of a related good will cause a decrease in Supply of this good.

So if you could be a personal trainer or a team coach, and the price of personal trainers went up, you would offer more personal training services and less coaching services

Switching between Dairy production and Lamb production are decisions made based on the price of related goods

Technology

Technology is the capital goods and processes that producers invest in to improve production

New technology always moves the Supply curve out to the left, otherwise it would not be taken on