Factors that cause a shift in supply
The state of the firm’s production process – i.e., technology
- As new technology is invented and as labour becomes more specialised and efficient and as employers become more skilful in organising and combining factors of production, it becomes possible to reduce the costs of production even though the price being paid those factors remain unchanged.
Taxation/Subsidies
- The cost of producing a commodity may also be affected by changes in taxation. If there is tax levied on the raw materials which are used in the manufacture of product. It represents an increase in the cost of production.
- If a subsidy is granted on the raw materials or for the labour employed for the finished good, this has the effect of reducing the cost of production.
Costs of Production
- The opposite would apply if costs of production were reduced, a greater quantity would be supplied at each price, i.e. the supply curve would shift to the right out from the origin.
Unplanned Factors
There may be changes in the quantity supplied, which were never intended by the producer. The activity to which this has relevance is agriculture, due to inconsistencies in the weather, crops may vary from one season to another or animals have been affected by diseases. There may be a shortage of raw materials or strikes by workers.
Factors influencing price elasticity of supply
- The unavailability of factors of production, e.g. highly skilled workers(specialization) may be needed/ labour may not be occupationally mobile.
- Producers may well be operating at close to full capacity.
- Firms have a low levels of raw material stocks, therefore there are no surplus finished goods to sell.
- The supply of capital goods (plant, machinery, equipment) may be fixed in the short run.
- With agricultural products, supply is inelastic in the short run perhaps, due to an unfavourable weather event in order to grow crops ,i.e. potatoes. Perishable goods are expensive to store. This will make supply in inelastic.
- Grapes are harvested once a year, therefore producers would not be able to ramp up production levels at short notice.
- Time Period – Flood defence projects– If there is heavy rainfall and flooding, there would be high demand for flood defences. But, to supply barriers against the floods cannot occur overnight. It can take many months of construction to build. The supply of new houses is relatively inelastic in the short term.
rice elasticity of supply
See more information on this topic in market structures: Cadburys