Movement along Supply Curve, Shifts in Supply Curve, Factors Determining Shift in Supply Curve

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Variation of supply curve and its transformation

The law of supply is the law of microeconomics.

It means if price rises, supply increases.

If price falls, supply decreases.

If price changes supply also changes.

Variation of supply curve and its transformation includes movement along supply curve and shifts in supply curve; they are explained below:

 

(A) Movement along Supply Curve

Movement along supply curve can be defined as graphical representation of change in supply for a commodity brought by change in its own price other things remaining constant.

If price changes supply also changes.

The change in supply is graphically shown by movement form a point to another point of same supply curve.

 

Expansion of supply

It is the graphical representation of expansion in supply brought by rise in price, other things remaining constant.

If price rises, the firm gets more revenue per unit.

To earn more profit it supplies more. The effect of rise in price in supply is called expansion in supply. 

It is shown by movement from A point in left side to another point B in right side of same supply curve.

 

Contraction of supply

It is the graphical representation of contraction in supply brought by fall in price, other things remaining constant. If price falls, the firm gets less revenue per unit so it supplies less.

The effect of fall in price in supply is called contraction in supply. 

It is shown by movement from point A in right side to another point C in left side of same supply curve.

 

 

In the above figure, movement from A to B is expansion or rightward movement along  supply curve due to increase in the price where movement from A to C is the contraction in supply or leftward movement along supply curve due to decrease in the price.

 

(B) Shifts in Supply Curve

It can be defined as diagrammatical representation of change in supply brought by change in any other factor determining supply other than price.

If any one of the factors changes, supply too changes at all possible prices.

To show the change in supply, we need to construct new supply curve.

Rightward shift

The graphical presentation of increase in supply due to the change in determinants like, technology, tax, subsidies, number of firms etc remaining the price same is rightward shift of supply.

To show rightward shift or increase in supply, we construct another supply curve at the right side of initial supply curve.

 

Causes of rightward shift:

·         Fall in interest rate, wage rate and rent.

·         Fall in prices of raw materials.

·         Innovation of new technology.

·         Decrease in corporate and indirect taxes.

·         Increase in availability of resources etc. 

 

Leftward shift

It is graphical representation of decrease in supply due to the determinants like technology, tax, subsidies, number of firm’s etc determinant remaining the price same is leftward shift of supply.

To show leftward shift or increase in supply, we construct another supply curve at the left side of initial supply curve.

 

Causes of leftward shift:

·         Rise in interest rate, wage rate and rent

·         Rise in prices of raw materials

·         Destruction in technology, skill and knowledge development among workers

·         Increase in corporate and indirect taxes

·         Decrease in availability of resources

 

 

 

 

In the above figure, SS is the initial supply curve where OQ is the quantity supply at OP price.

Price remaining constant, when the other determinants of the supply are changed, the supply curve is shifted to the right side and formed new supply curve S₂S₂ where the quantity supply is increased to OQ₂.

Shifting from SS to S₂S₂ is the rightward shifting in the supply curve.

Similarly, Shifting from SS to S₁S₁ is the leftward shifting in the supply curve which shows decrease in the supply.

 

Factors Determining Shift in Supply Curve

The major factors determining shift in supply curve are given below:

Prices of raw materials 

Supply is inversely related to the prices of inputs. Inputs are land, labor, capital and raw materials.

Their prices are wage rate, rent, interest rate etc.

If the price of inputs increases, the cost of production also increases.

It reduces the supply of the good s and services in the market and vice versa.

 

Level of technology

Supply is positively related to the level of technology.

If there is advancement in technology, the firm can produce and more products at the same price.

But, if there is destruction of technology due to any cause, then supply decreases.

 

Resources available

Supply is positively related to resources available.

If there is appropriate availability of resources, then the firm can produce and supply more quantity at the same price.

But, if there is no more stock of resources supply decreases.

 

Expected profit margin

If there is more profit margins to the firm, the firm supplies more and vice versa.

But, if the firm expects more profit in the near future, current supplies less and vice versa.

 

Government policy

Supply is inversely related to taxes.

If there is high tax rate, there is less supply but if the government imposes less tax, supply increases (subsidies to increase supply).

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