A Decrease in Supply

Click on the diagram above to enlarge it.

An decrease in supply is represented by a shift of the supply curve to the left.
Ceteris paribus, in the new equilibrium:

Supply has decreased. (The supply curve shifted to the left.)
Demand is unchanged. (The demand curve did not move.)
The quantity supplied decreased to the new equilibrium quantity.
The quantity demanded decreased to the new equilibrium quantity.
The equilibrium price increased.

An Increase in Supply

An increase in supply is represented by a shift of the supply curve to the right.
Ceteris paribus, in the new equilibrium:

Supply has increased. (The supply curve shifted to the right.)
Demand is unchanged. (The demand curve did not move.)
The quantity supplied increased to the new equilibrium quantity.
The quantity demanded increased to the new equilibrium quantity.
The equilibrium price decreased.

Shifts in Supply

INSERT DIAGRAM HERE.

How Shifts in SUPPLY Affect the Market Equilibrium

The following example illustrates how a change in supply changes the equilibrium price.

Orange Juice Market Example

Most of the oranges grown in Florida are used to make orange juice. Suppose a hurricane hits Florida and destroys a large portion of the orange groves. What affect will this have on equilibrium in the orange juice market? Because orange groves have been destroyed, the supply of orange juice decreases. The SUPPLY CURVE shifts left. At every possible price, less orange juice is produced than before the orange groves were destroyed.

Since the demand curve has not shifted, the new equilibrium occurs at a higher market price and a smaller quantity of orange juice.

Shifts in Supply

INSERT DIAGRAM HERE.

Shifts in supply occur to the right for increases and left for decreases. At every possible price, there is a different quantity supplied.


Figure 6. An increase in supply is illustrated by a shift of the supply curve to the right.

Figure 7. A decrease in supply is illustrated by a shift of the supply curve to the left.


Things that shift supply

The supply of a product may shift because of changes in

1. the number of producers. A larger number of producers increases the supply. A smaller number of producers decreases the supply.

2. The cost of inputs. Higher input costs decrease supply. Lower input costs increase supply.

3. Technology. Technological innovations tend to increase supply.

4. weather. For agricultural products, goods weather increases supply. Bad weather, such as droughts or floods, decreases supply.

5. expectations. Expectations can either increase or decrease supply.

INSERT DIAGRAM HERE

A decrease in supply is illustrated by a shift of the supply curve to the left.

A decrease in supply can be caused by:

• a decrease in the number of producers.
• an increase in the costs of production (such as higher prices for oil, labor, or other factors of production).
• weather (e.g., droughts, floods, or freezing temperatures decrease agricultural production)
• loss of technology (Technological innovations typically increase supply. If technology were to be lost, there could be a decrease in supply.)
• expectations (e.g., producers might decrease current production if they anticipate more favorable market conditions in the future.)

When there is a decrease is supply with no change in demand, the new equilibrium occurs at a higher market price and smaller quantity.

Supply

Supply is the relationship between various prices of a product and the corresponding quantity that producers are willing and able to sell at each of those prices.

The quantity supplied is the amount that producers are willing and able to sell at a particular price.

The law of supply states that, other things equal, the quantity supplied of a product increases when the price of the product increases.

A supply schedule is a tabular representation of supply.


Price of a Hamburger Quantity of Hamburgers Supplied
$5 5
$4 4
$3 3
$2 2
$1 1
Table 2. An Example of a Supply Schedule

A supply curve is a graphical representation of supply. A supply curve can be a straight or curved line.) It is traditional in economics to place price on the vertical axis and quantity on the horizontal axis. On the graph of a supply curve, the quantity supplied at a particular price is the horizontal distance between the vertical axis and the supply curve.


Figure 5. An upward sloping supply curve.