Definition
Determinant of supply: any influence on the quantity supplied other than the good's own price; a change in one shifts the whole supply curve.
- Producers decide how much to offer by comparing the price they receive with the extra cost of making each unit.
- At a given own price, anything that lowers unit cost makes each unit more profitable, so firms supply more at that same price.
- That greater willingness to supply at every price is drawn as a rightward (+) shift of the whole curve, while a cost-raising condition shifts it left (−).
- The good's own price is held constant throughout, so a determinant change is always a shift, never a movement along; this is developed in 2.1.6 and 2.1.7.
Key Idea
- The determinants are the conditions of supply: everything that fixes the position of the curve except the good's own price.
- Lower unit costs shift supply right; higher unit costs shift it left.
The conditions of supply
- Costs of production: when the world price of crude oil falls, plastics, fertiliser and transport all get cheaper, cutting unit costs and shifting supply right; a rise in the UK National Living Wage raises labour costs and shifts it left.
- Technology: robotic welding lines in a car plant lift output per worker and cut the cost of each vehicle, so supply shifts right.
- Prices of goods in competing supply: if wheat becomes more profitable, arable farmers switch fields from barley to wheat, so the supply of barley shifts left.
- Indirect taxes and subsidies: a fuel duty of £2 per litre adds to unit costs and shifts supply left, whereas a £1,500 subsidy per heat pump lowers effective costs and shifts supply right.
- Number of firms: when new couriers join a food-delivery market, extra sellers add to total supply and shift the curve right; firms leaving shift it left.
- Weather and other shocks: a bumper UK harvest shifts wheat supply right (+), whereas a drought in Brazil damages the coffee crop and shifts supply left (−).
Example
- A government pays farmers a subsidy of £2 for every unit of a crop they sell.
- The subsidy cuts the effective cost of supplying each unit by £2.
- At each price, producers now supply the quantity they would previously have offered only at a price £2 higher.
- The whole supply curve therefore shifts down and to the right by £2 per unit, a shift and not a movement along.
How large is the shift?
- A shift resets the quantity supplied at every price, moving the market to a new equilibrium.
- The size of the shift depends on how far the condition changes unit cost: a +2% rise in energy costs shifts supply only slightly, but a +30% surge shifts it far.
- How far equilibrium price and quantity then move depends on the price elasticity of demand, so the outcome is not automatic: it depends on how sensitive buyers are to price.
Exam technique
- Ask first whether the good's own price changed, which is a movement, or a condition changed, which is a shift.
- Treat indirect taxes and subsidies as shifts, not movements.
- Draw the new curve, label it S1, then read off the new equilibrium.
Common Mistake
- Do not show an indirect tax as a movement along the curve; it raises costs at every price, so it shifts the whole curve left.
- Do not forget the prices of goods in competing supply; a more profitable alternative shifts this good's supply left.
Self review
- What distinguishes a determinant of supply from the good's own price?
- Name five determinants of supply.
- How does better technology affect supply, and why?
- How is an indirect tax shown on a supply diagram?
- On what does the size of a supply shift depend?
