A firm's decision to supply a good and market supp
- The supply curve shows the relationship between the amount offered for sale and the price.
- The main objective for firms is to maximise profits. When working out how much to supply, they cosider costs of production and the market price of the good.
- However, as firms produce more, the costs of producing an additional unit will rise so prices need to rise too.
- the higher the price, the greater the incentive to move resources from an alternative use into that particular market.
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Factors causing shifts in supply
- Changes in raw material prices - if there is a rise in these prices, costs of production rise meaning that firms that continue to supply the at the same price will make less profit. This reduces the incentive to supply and will shift the curve to the LEFT.
- Tech improvements - this raises efficiency and lowers costs. At the same price, profit margins are bigger and there is greater incentive to increase output with a shift to the RIGHT.
- Increases in labour productivity - if on average, workers output rises, costs of production will fall, increasing the level of supply and shifting it to the RIGHT.
- Regulation and bureaucracy - govts. often use this to add costs to firms, often additional investment and infrastructure to meet the new laws and also the extra admin costs to check if firms are following these rules - compliance costs.
- Wage rates - if wages rise, ceteris paribus, (all other factors remain) then production costs will rise, shifting the curve to the LEFT.
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Factors causing shifts in supply 2
- Subsidies to producers - reduce costs, making it more likely to achieve profits, shift to RIGHT.
- Indirect taxes - without raising prices, at the same price firms will make less profit because some of their revenue will be owed to the tax office.
- Expectations about future prices - if prices may rise, firms may hold back supply and v.v.
- Objectives of firms - other than maximising profit, some firms might have other objectives such as increasing market share or selling more.
- The number of sellers in the market will increase supply so the curve will shift to RIGHT.
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