Question

Explain five determinants of shift in supply curve.

Answer 1

1. Changes in Technology: At any one time, what and how much is produced is determined by the technology being used. Now, if production technology improves, lowering the average cost of production, the firm can increase its profits. As a result, at each price point, there will be more supply than before, causing the supply curve to shift to the right.
2. Changes in Goals of the Firm: Different firms may have varying goals. For example, some businesses may desire to avoid risk and pursue safer lines of activity, even if these lines guarantee lower likely returns. In this instance, at each price level, they may produce less than previously, generating a shift to the left on the supply curve. If their purpose is to maximise sales rather than profits, they may sell more than before at each price level, generating a rightward shift in the supply curve.
3. Changes in the Nature of Firms: As the number of firms selling similar items in the market grows at each price level, each firm's share of market supply may decrease. In this instance, the individual supply curve would shift leftward. However, the market supply curve would shift to the right in this situation, because, at each price level, the market supply of that commodity would be greater than previously.
4. Changes in government policy: Changes Changes in government policy may cause an increase or reduction in the supply of a product at each price point. For example, if the government adds sales tax, the merchant will supply the same quantity but at a higher price than previously. This would cause a leftward change in the supply curve. The original supply curve is SS₀, and the seller is willing to offer QQ₀ of X for a price Op₀. However, once the government imposed sales tax, the seller wishes to supply the same quantity at a higher price, Op₁, resulting in a change in the supply curve from S0S0. Again, if the government provides a subsidy to the seller, the seller can sell the same quantity for a lower price Op₂ than before in this situation. There will be a rightward shift in the commodity supply from S₀S₀ to S₂S₂.
5. Changes in Prices of Inputs: The supply curve varies when output grows or decreases, and hence supply increases. On the other side, any increase in input prices raises the cost of production, resulting in a drop in supply (leftward shift in the supply curve). An increase in an input price shifts the supply curve to the left, whereas a drop shifts it to the right. In this graph, S₀S₀ represents the original supply curve. When the input price rises, it moves to S₁S₁ and then to S₂S₂ when the price lowers.

Answer 2

1. High cost of production due to use of obsolete technique and machines.
2. High cost of production due to increased prices of factors of production.
3. Fall in the number of firms.
4. Rise in input prices.
5. Increase in excess tax rate.