Price is not the only factor that affects the supply of an individual firm or the market. These other factors are referenced to as the non-price determinants of supply.
Non-Price Determinants of Supply
Factors, other than price, that can affect the supply of a firm (or multiple firms) and shift (change position) the supply curve.
Note
The most important thing to note in this topic is that:
- Changes in price changes the amount of a good or service supplied (causing a movement along the supply curve).
- Changes in the non-price determinants of supply change the supply in the market (causing a shift of the supply curve).
- A rightward shift means that for a fixed given price, supply increases and more is supplied.
- A leftward shift means that for a fixed price, supply decreases and less is supplied.
The non-price determinants of supply covered in the IB curriculum:
- Changes in costs of factors of production.
- Price of related goods.
- Indirect taxes and subsidies.
- Future price expectations.
- Changes in technology.
- Number of firms in the market.
Changes in costs of factors of production (FOPs)
Factors of production
All resources or inputs used to produce goods and services.
Increased costs of factors of production → leftwards shift
- When the costs of FOPs rise (such as higher wages, increased rent, or pricier raw materials) production becomes more expensive.
- This increase in costs reduces the quantity that the firm (or firms) is willing and able to supply for every given price.
Decreased Costs → rightwards shift
- Alternatively, If FOPs costs fall, production becomes cheaper and more profitable.
- This reduction in costs means the firm (or firms) is willing and able to supply more for a given price
Prices of related goods: competitive and joint supply
Competitive supply
Competitive Supply
Goods or services in Competitive Supply are alternate use of resources of each other where they compete for the use of the same resources.
If two goods are in competitive supply, producing more of one means that the production of the other has to be reduced.
Example
Assume that a company $A$ can use its resources to produce smartphones or smartwatches.
- If the company produces more smartwatches, it has to produce less smartphones.
- If it produces more smartphones, then it has to produce less smartwatches.
Higher prices of a competing good → leftwards shift
- A rise in the price of one good (e.g., smartwatches) incentivises firms to produce more of that good (more smartwatches since their price has increased).
- Therefore, this leads to the supply of the competing goods (e.g., smartphones) to fall because the resources are allocated to the goods in which the prices increased (since firms look to increase their revenue).
Lower prices of a competing good → rightward shift
- Alternatively, a fall in the price of one good (e.g., smartwatches) encourages firms to shift their resources to the other goods (smartwatches cheaper, less profitable).
- Hence, this increases the supply of the competing goods (e.g., smartphones).
Common Mistake
Even though we talk about price change here, notice the price only changes of the competing good, not the price of the good itself. For example:
- Price of smartwatches increases
- Quantity supplied of smartwatches goes up
- More resources for smartwatches, less for smartphones
- Supply of smartphones reduces
Notice, the change in supply of smartphones happens due to a change in the price of smartwatches, not the price of smartphones itself.
Hence this is still a non-price determinant since it is concerned with the price of the other competitive good.
You may also note that:
- The change in price of smartwatches affects quantity supplied of smartwatches.
- However, since it is a non-price determinant for smartphones, it affects it's supply.
Joint supply
Joint Supply
Goods or Services in Joint Supply are consequences of each other and derived from a single process or product.
If goods are in joint supply, the production of one good will automatically cause the production of the others.
Example
Assume that a company uses its resources to product beef.
- By processing the cows, the company also gets leather, which it can also sell.
- If the company produces more beef, it has to utilise more cows, and therefore it gets more of both beef and leather
Increased supply for a main product → rightwards shift
- A rise in supply for the primary product (e.g., beef) means more resources are used to produce that product (more cows used).
- Hence, any joint supply goods or services will also increase in supply since they are made from the same process or product (e.g., leather).
Decreased supply for a main product → leftwards shift
- A fall in supply for the primary product (e.g., beef) means less resources are used to produce that product (less cows).
