IB Economics 2.2.4 Non-price Determinants of Supply Notes

How Non-Price Determinants Shift Supply

1. The good's own price is the only influence inside the supply model, so it is endogenous
2. A change in it moves you along the curve and changes quantity supplied.
3. Every other influence sits outside the model.
4. These non-price determinants are exogenous: they shift the whole curve, changing supply at every price.
5. A change in supply always means this kind of shift.
6. Six non-price determinants shift supply:
   1. the costs of factors of production
   2. indirect taxes and subsidies
   3. changes in technology
   4. future price expectations
   5. the number of firms in the market
   6. the prices of related goods (competitive and joint supply)

Costs, Taxes, and Technology: What Changes Per-Unit Cost

1. Three determinants work by changing the cost of producing each unit:
   1. Costs of factors of production
      1. Lower input costs (wages, rent, raw materials) make each unit cheaper, so firms supply more and the curve shifts right.
      2. Higher costs shift it left.
   2. Indirect taxes and subsidies
      1. A higher indirect tax adds to per-unit cost and shifts supply left.
      2. A subsidy lowers per-unit cost and shifts it right.
      3. A smaller subsidy acts like a tax rise; a bigger subsidy shifts it further right.
   3. Changes in technology
      1. Better technology lowers the cost per unit, so firms supply more and the curve shifts right.
      2. A breakdown or obsolescence shifts it left.

Expectations and Firm Numbers: Shifting Supply Without Touching Cost

1. Two more determinants shift the whole curve without touching per-unit cost:
   1. Future price expectations
      1. If firms expect a higher price soon, they hold output back to sell later, so supply today falls and the curve shifts left
      2. Expecting a lower price pushes more out today and shifts it right.
      3. Oil producers expecting a price jump next month cut today's supply.
   2. The number of firms
      1. More firms add more producers, so market supply shifts right.
      2. Firms leaving shift it left, the market-supply logic from 2.2.3.

Prices of Related Goods: Competitive and Joint Supply

1. The price of a related good shifts this good's supply in two ways:
   1. Competitive supply
      1. Goods made from the same resources, so producing more of one means less of the other (a firm that can make smartphones or smartwatches).
      2. When a competing good's price rises, firms move resources toward it, so this good's supply shifts left.
      3. When it falls, supply shifts right.
   2. Joint supply
      1. Goods where producing one automatically produces the other (processing cattle for beef also yields leather).
      2. When the main product's output rises, the joint good rises with it and shifts right.
      3. When it falls, the joint good shifts left.
2. In both cases it is the price of the other good, not this good's own price, that moves the curve, so it stays a non-price determinant for this good.