Non-Price Determinants of Supply (DP IB Economics)

Non-Price Determinant

Explanation

Condition

Shift

Condition

Shift

Changes to costs of production
(COP)

• If the price of raw materials or other costs of production change, firms respond by changing supply

COP
Increases

S decreases, shifting left
(S→S₁)

COP
Decreases

S increases, shifting right
(S→S₂)

Indirect taxes

• Any changes to indirect taxes change the costs of production for a firm and impact supply

Taxes Increase

S decreases, shifting left
(S→S₁)

Taxes Decrease

 
S increases, shifting right
(S→S₂)

Subsidies

• Changes to producer subsidies directly impact the costs of production for the firm

Subsidy Increases

S increases, shifting right
(S→S₂)

Subsidy Decreases

 
S decreases, shifting left
(S→S₁)

New technology

• New technology increases productivity and lowers costs of production

• Ageing technology can have the opposite effect

Technology Increases

S increases, shifting right
(S→S₂)

Technology Decreases

S decreases, shifting left
(S→S₁))

Change in the number of firms in the industry

• The entry and exit of firms into the market has a direct impact on the supply

• E.g. If ten new firms start selling building materials in Hanoi, the supply of building material will increase

No. of Firms Increases

S increases, shifting right
(S→S₂)

No. of Firms Decreases

S decreases, shifting left
(S→S₁)

Weather events

• Droughts or flooding can cause a supply shock in agricultural markets

• A drought will cause supply to decrease. Unexpectedly good growing conditions can cause supply to increase

Drought

S decreases, shifting left
(S→S₁)

Good Weather

S increases, shifting right
(S→S₂)

Future price expectations

• If firms expects the price of a good/service to increase in the future, they will start supplying more

• If firms expects the price of a good/service to decrease in the future, they will start supplying less

Expectations price will rise

S Increases
Shifts Right
(S→S₂)

Expectations price will fall

 S Decreases
Shifts Left
(S→S₁)

Goods in joint supply

• When there is an increase of supply of one good in joint supply (e.g. beef), possibly due to higher prices, there will be an increase in supply of the other good too (e.g. leather)

Supply of one good rises

S good A Increases

Shifts Right
(S→S₂)

Supply of the other good rises

S good B Increases
Shifts Right
(S→S₂)

Goods in competitive supply

• Farmers can produce many goods which are competitive in supply

• E.g. A farmer can grow wheat or potatoes. When they increase the supply of potatoes, the supply of wheat decreases

Supply of one good rises

S good A Increases

Shifts Right
(S→S₂)

Supply of the other good falls

 S Decreases
Shifts Left
(S→S₁)