Factors Which Cause the Supply Curve to Move Upwards Downwards and Outwards - Essay Example

Economic analysis holds importance for business units and businesses takes decision to ensure that the efficiency improves. Supply is a concept which holds importance when a business takes a business decision. The different determinants of supply bring a change in the decision making process of a business. This has made human determine the price of the product to be charged by the determinants of demand and supply. Supply for a good changes with a change in various factors. The paper thereby looks into different factors which cause the supply curve to move upwards downwards and outwards. Before moving on it is important to discuss some specific terms which will help to improve the learning process. Demand is “the amount of goods demanded at a certain price” (Colell, Winston, Michael, & Jerry, 1995) where as supply is “the amount of goods the producers is willing to supply at a given price” (Colell, Winston, Michael, & Jerry, 1995). An important thing to note here is that demand shows the inverse relationship between price and quantity demanded (Garg, 2010). Where as law of supply shows the direct relationship between price and quantity. This makes the equilibrium price to be determined by the intersection of the demand and supply curve which looks as follows. It is evident that the quantity demanded is Q1 at the price 6. This demand forms An important part of the overall planning process and helps an organization to determine their course of actions. This has been substantiated by a study which states that the supply curve slopes upwards and happens due to changes in price and other factors which have a bearing on quantity supplied (Mayerhoefer & Zuvekas, 2008). The supply curve as a result either shifts upwards or downwards along the same curve or move outwards or inwards. Movement along the supply curve happens when there is a change in price of the goods and other things remain the same (Supply Curve, 2011). For example a rise in price of sugar increases the quantity suupplied of sugar. The graph for movement along the supply curve when the price falls and supply falls looks as follows In the above graph we see that a decrease in price decreases supply thereby highlighting the movement along the supply curve. The following graph shows the movement along the supply curve when the price rises and the supply rises. It looks as follows The above chart shows the increase in supply due to rise in prices. An important thing to note during the movement along the supply curve is that other things remain equal which states that factors other than price will not change and remain the same. (Garg, 2010) This is also stated by a study that business units being able to identify the correct supply curve are able to understand the manner in which the customer perception changes towards a product thereby changing the supply for the goods and services (Docters, Schefers, Korman & Durman, 2008). Shift in supply curve occurs when factors other than price changes. Example of movement in supply curve is rise in price of bread and example of shift in the supply curve is change in cost of production which reduces the demand for bread. An important aspect of shift in supply curve is that price remains the same but factors other than it changes (Demand, 2011). The graph for a shift in supply curve due to factors other than prices is as below. When there is a change in production process the supply will fall if the cost of production increases which is shown in the chart graph below where the quantity supplied has fallen. The above graph shows that the supply for a good or services fall due to the negative perception prevalent in the market. This could also happen due to the fact that people have a different idea about the market. When the cost of production decreases the supply for goods increases as suppliers are willing to sell more. This is represented below The above chart shows that the quantity supplied increases due to the positive sentiments that are prevalent between the suppliers. The shift in the supply curve happens due to factors other than price. A study also substantiates the same by stating that shift in the supply curve happens due to factor beyond the control of firms and firms need to identify those so that they are able to predict the supply correctly (Shepherd, 2006). The factors which thereby results in the supply curve to move outwards or inwards are as follows Change in cost of production: A change in the cost of production brings about a change in quantity supplied (Quantity Supplied, 2011). For example increase in cost of production decreases the supply for furniture and a fall in the same will increase supply. An important thing to note during change in cost of production is that it has a different relationship for different type of goods. For example a change in cost of production behaves differently for normal goods in comparison to giffen goods. Change in price of related goods: Change in price of related goods make the supply curve move outwards or inwards. Goods on this category are divided into substitute goods and complementary goods. Substitute goods are those goods which can be used in place of one another. For example, gold and diamond; if the price of gold increases then the supply of diamond will decrease because diamond is cheaper. (Garg, 2010) Complimentary goods are those goods which are used together. For example if the price of socks has increases then the supply for shoes will increase. An important aspect to note here is that the supply curve behaves differently for substitute and complimentary. This makes the supply curve appear different in case of changes in the price of related goods. Change in tax structure: A change in tax structure also has a bearing on the change in supply as the supply curve shifts outwards or inwards. For example, if the tax rises supply for sugar will decrease which will make the supply curve move outwards and vice versa (Quantity Supplied, 2011). Change in climate. A change in climate also brings a change in quantity supplied for a good or services. For example, it winter is approaching then the supply for woollen wear will rise and summer clothes fall (Quantity Supplied, 2011). These are factors which are beyond control and result in the shift in the supply curve. Change in future expectation: A change in the future expectation also changes the supply curve. For example if the supplier expects the price to fall in the future the supply will fall and vice versa (Quantity Supplied, 2011). Changes in price bring about a change in demand as suppliers supply more products at a higher price compared to products at a lower price. Change in firms’ objective. For example, it the firm looks towards increase in sales then supply will rise as the main objective of the supplier has changed. Changes in quantity supplies happens when there is a change in price of the goods whereas changes in supply curve occurs when factors other than price changes. Example of movement in supply curve increase in supply of bread due to rise in price and example of shift in the demand curve is increase in supply of bread due to fall in price of flour. (Garg, 2010) Thus the shift in the supply curve happens due to various factors other than prices which make the supply curve to move outwards. The paper thus looks in the various aspect of supply. The paper presents the differences between shift in the supply curve and movement along the supply curve. It highlights the different area where supply changes due to changes in factors. This has also been substantiated by different findings which helps to highlight the importance that supply has and the importance supply has in the planning process. References Colell, M., Winston, A., Michael, D. & Jerry, R. 1995. Microeconomic Theory. 3r Edition, New York, Oxford University Press, Pearson Education Supply Curve. 2011. The Supply Curve. Retrived on August 3, 2011 from http://www.netmba.com/econ/micro/supply/curve/ Docters, R., Schefers, B., Korman, T. & Durman, C. 2008. The neglected supply curve: how to build one and benefit. Journal of Business Strategy, Volume 25, issue 5, pp. 19-25 Supply. 2011. Factors affecting Supply. Retrived on August 3, 2011 from http://www.economicshelp.org/microessays/equilibrium/supply.html Garg, S. 2010. Microeconomics: Introductory. 7th edition, pp 3.11-9.17, Dhanpat Rai Publication Mayerhoefer, C. & Zuvekas, S. 2008. The shape of Supply: what does it tell us about direct to consumer marketing. The B.E. Journal of Economic Analysis & Policy, Volume 18, Issue 2, pp. 4-8 Shepherd, G. 2006. Vertical & Horizontal Shifts in Supply curve. The Econometric Society, Volume 4, No. 4, pp. 361-367 Quantity Supplied. 2011. Supply. Retrived on August 3, 2011 from http://www.cliffsnotes.com/study_guide/Supply.topicArticleId-9789,articleId-9728.html Read More