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Microeconomics Essentials: Shifts in Supply and the Determinants of Supply

Capítulo 5

Estimated reading time: 7 minutes

What it means to “shift supply”

A shift in supply happens when sellers are willing and able to produce a different quantity at every price. Graphically, the entire supply curve moves: right for an increase in supply (more offered at each price) and left for a decrease in supply (less offered at each price). The key idea is that a shift is caused by non-price determinants—factors other than the good’s own price that change production costs, productivity, or profitability.

In this chapter, you will practice a consistent diagnostic routine: identify the determinant, decide whether sellers’ costs go up or down (or whether profitability changes), then infer the direction of the supply shift.

Quick diagnostic routine (step-by-step)

Step 1: Name the determinant (input prices, technology, taxes/subsidies, expectations, number of sellers, shocks).
Step 2: Translate it into cost per unit or productivity (does marginal cost rise/fall? does output per input rise/fall?).
Step 3: Translate cost/productivity into profitability at each price (higher/lower profit for the same price).
Step 4: Decide the shift: profitability up → supply increases (shift right). Profitability down → supply decreases (shift left).

Determinants that shift supply (non-price factors)

1) Input prices

Scenario: A bakery buys flour, butter, and electricity. A drought raises wheat prices, and flour becomes 30% more expensive.

Shift direction: Supply decreases (shift left).

Economic reasoning: Higher input prices raise the bakery’s cost per loaf. At each possible selling price, the bakery earns lower profit (or larger losses), so it is willing to supply fewer loaves.

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Contrast scenario: A new supplier enters the market and offers cheaper flour.

Shift direction: Supply increases (shift right).

Reasoning: Lower input costs raise profitability at each price, so firms expand output.

2) Technology (and productivity improvements)

Scenario: A clothing factory installs automated cutting machines that reduce fabric waste and labor hours per shirt.

Shift direction: Supply increases (shift right).

Economic reasoning: Better technology increases output per unit of input and lowers marginal cost. With lower costs, producing shirts is more profitable at every price, so firms supply more.

Reverse scenario: A key software system fails for weeks, slowing production lines.

Shift direction: Supply decreases (shift left).

Reasoning: Productivity falls, unit costs rise, profitability falls.

3) Taxes and subsidies

Scenario (tax): The government imposes a $2 per unit excise tax on bottled drinks paid by producers.

Shift direction: Supply decreases (shift left).

Economic reasoning: A per-unit tax increases the firm’s cost per unit (like an added input cost). At each market price received from buyers, the producer keeps less net revenue, reducing profitability and output supplied.

Scenario (subsidy): A $2 per unit subsidy is paid to producers of the same bottled drinks.

Shift direction: Supply increases (shift right).

Reasoning: A subsidy effectively lowers net cost (or raises net revenue) per unit, increasing profitability at each price and encouraging more production.

4) Expectations (about future prices or costs)

Scenario: Coffee growers expect coffee prices to be much higher next month due to a forecasted shortage. They can store beans for a short time.

Shift direction: Supply decreases today (shift left today).

Economic reasoning: If sellers expect higher future prices, the opportunity cost of selling now rises. Holding inventory becomes more attractive, so firms supply less today at each current price.

Alternative scenario: A manufacturer expects a major increase in input costs next month (e.g., a contract price hike for steel). It accelerates production now to avoid higher future costs.

Shift direction: Supply increases today (shift right today).

Reasoning: Producing earlier avoids expected cost increases, raising current profitability relative to later production.

5) Number of sellers (market entry/exit)

Scenario (entry): New food trucks enter a city after permit rules are simplified.

Shift direction: Supply increases (shift right).

Economic reasoning: More sellers means greater total market capacity. At each price, the market can supply more because there are more firms producing.

Scenario (exit): Several small farms shut down after sustained losses.

Shift direction: Supply decreases (shift left).

Reasoning: Fewer sellers reduces total output available at each price.

6) Shocks (weather, natural events, supply chain disruptions)

Scenario (weather): A frost destroys part of the orange crop.

Shift direction: Supply decreases (shift left).

Economic reasoning: The shock reduces feasible output (capacity) and raises effective cost of obtaining oranges. With less available to sell at any price, the supply curve shifts left.

Scenario (supply chain disruption): A port closure delays key components for electronics manufacturers.

Shift direction: Supply decreases (shift left).

Reasoning: Inputs become harder to obtain; production slows; costs rise (expediting, alternative sourcing), reducing profitability and output.

Scenario (positive shock): A new shipping route reduces delivery times and freight costs for many firms.

Shift direction: Supply increases (shift right).

Reasoning: Lower logistics costs reduce unit costs, increasing profitability at each price.

Practice distinguishing: shift in supply vs shift in demand

Many real-world headlines can be interpreted as either supply-side or demand-side changes. The fastest way to avoid confusion is to ask: Did something change sellers’ costs/capacity (supply) or buyers’ willingness to pay (demand)?

Side-by-side graph practice (ASCII)

Shift in Supply (example: input costs rise) Shift in Demand (example: tastes increase)

Price
  |
  |      S2
  |     /
  |    / S1
  |   /  
  |  /   
  | /    
  |/________ Quantity
      D

S shifts left: S1 → S2
Equilibrium: P up, Q down

Price
  |
  |      S
  |     /
  |    /
  |   / 
  |  /  
  | /   
  |/________ Quantity
   D1  D2

D shifts right: D1 → D2
Equilibrium: P up, Q up

Key pattern to memorize:

Supply decreases (left): tends to raise equilibrium price and lower equilibrium quantity.
Demand increases (right): tends to raise equilibrium price and raise equilibrium quantity.

Notice how price can rise in both cases. That is why you must identify the underlying cause (cost/capacity vs willingness to buy), not just the observed price change.

Another side-by-side comparison (when price falls)

Supply increases (example: technology improves) Demand decreases (example: preferences shift away)

Price
  |
  |   S1
  |  /
  | / S2
  |/________ Quantity
      D

S shifts right: S1 → S2
Equilibrium: P down, Q up

Price
  |
  |      S
  |     /
  |    /
  |   /
  |  /
  | / 
  |/________ Quantity
   D2  D1

D shifts left: D1 → D2
Equilibrium: P down, Q down

Again: price falling could be supply increasing or demand decreasing. Use the story to decide which curve moves.

Mixed practice: identify which curve shifts and why

For each item, answer with: (1) which curve shifts (Supply or Demand), (2) direction (Left/Right), (3) the determinant and the cost/profitability logic.

Battery producers face a sudden increase in lithium prices.
- Identify the curve shift and explain using unit cost and profitability.
A new manufacturing process lets firms produce 20% more output with the same labor hours.
- Identify the curve shift and explain using productivity and marginal cost.
The government introduces a per-unit subsidy for domestic wheat farmers.
- Identify the curve shift and explain using net revenue per unit.
Firms expect the selling price of their product to be much higher next quarter and can store inventory cheaply.
- What happens to supply today? Explain using opportunity cost of selling now vs later.
Several firms exit the market after a long period of losses.
- Identify the curve shift and explain using total market capacity.
A hurricane damages oil refineries along the coast.
- Identify the curve shift and explain using capacity constraints and costs.
Consumers suddenly prefer plant-based milk over dairy milk.
- Identify the curve shift and explain using willingness to buy (not costs).
Shipping container prices fall sharply due to improved logistics and fewer delays.
- Identify the curve shift and explain using distribution costs.
News reports claim “prices rose,” and you learn it was caused by a new sales tax collected from producers.
- Explain why the correct interpretation is a supply shift, not a demand shift.
Prices rose and quantities rose in the market for gym memberships after a popular fitness trend went viral.
- Identify the curve shift consistent with both price and quantity rising, and explain the determinant.

Now answer the exercise about the content:

A government introduces a per-unit subsidy paid to producers of a good. Which change is most consistent with this policy?

You are right! Congratulations, now go to the next page

You missed! Try again.

A per-unit subsidy increases producers’ profitability at each market price by raising net revenue (or lowering net cost) per unit, so supply increases and shifts right.