A) The distinction between movements along a supply curve and shifts of a supply curve
Supply is the goods and services that firms are willing and able to provide to customers at given time period. As price increases the quantity of goods and services that firms are willing to supply increases (positive relationship). This is due to the fact that as price increases the profit gained by firms will increase; therefore rational profit maximising firms will chose to supply more. This is known as the profit motive. In addition to this as firms increase their output they need to charge a higher price in order to cover the increased costs that are involved with higher output. On the other hand a decrease in the price of goods and services will lead to a decrease in good/services supplied as there is less incentive for firms to provide the same quantity of the good/services. Movements along the supply curve are known as extensions and contractions of supply. This model assumes ceteris paribus and therefore assumes all other things remain equal.
B) The factors that may cause a shift in the supply curve (the conditions of supply)
Shifts in supply are caused by changes in the costs of production for firms.
- Technology – Advancements in technology allow firms to produce goods more efficiently thus reducing firms costs of production leading to an increase in output.
- Indirect taxes (specific and ad valorem) – A reduction in tax will reduce the firms overall costs and therefore allow firms to increase the quantity of good/services they provide.
- Subsidies – By providing subsides it reduces the firms costs and therefore encourages them to increase the quantity of goods/services that they provide.
- Productivity – An increase in productivity will allow firms to increase the quantity of goods/services that they provide.
- Number of firms – An increase in the number of firms in a market will lead to an overall increase in the supply of goods/services to the market.
- Weather – Changes in the weather can affect the supply of certain goods/services to a market. For example, goods such as coffee are heavily reliant on the weather. If the weather is bad for long periods of time then it can result in crops being damaged and therefore supply being reduced. On the other hand, if the weather is better than usually then supply is likely to increase.
- Exchange rates – An appreciation in the value of currency will reduce the price of imports and therefore will lead to an increase in the supply of goods/services in given markets. This is due to the fact that firm’s costs of production will decrease thus allowing them to increase the quantity of goods/services that they provide.