Non-Price Factors Affecting Supply

Introduction

The supply curve illustrates the relationship between the price of a good or service and the quantity that sellers are willing and able to offer for sale. However, supply is influenced by factors other than price. These are called non-price factors and they cause a shift in the entire supply curve (either to the left or right), rather than a movement along the curve.

KEY TAKEAWAY: Changes in price cause a movement along the supply curve, while changes in non-price factors cause a shift of the entire supply curve.

Key Non-Price Factors Affecting Supply

1. Changes in the Costs of Production

• The costs of production refer to the expenses incurred by businesses when producing goods or services. These costs include:
  • Land: Rent, raw materials.
  • Labour: Wages, salaries, on-costs (superannuation, payroll tax).
  • Capital: Interest rates on loans, cost of machinery, utilities.
• Impact on Supply:
  • Increased costs of production: Lead to a decrease in supply (supply curve shifts to the left) because firms are less willing to supply at any given price. This is because profitability decreases.
  • Decreased costs of production: Lead to an increase in supply (supply curve shifts to the right) because firms are more willing to supply at any given price. This is because profitability increases.
• Example: An increase in the minimum wage will increase labour costs, decreasing the supply of goods and services that rely heavily on labour.

2. Number of Suppliers

• The number of suppliers in a market directly affects the market supply.
• Impact on Supply:
  • Increase in the number of suppliers: Leads to an increase in market supply (supply curve shifts to the right). More firms are offering the product at any given price.
  • Decrease in the number of suppliers: Leads to a decrease in market supply (supply curve shifts to the left). Fewer firms are offering the product at any given price.
• Example: If several new coffee shops open in a city, the market supply of coffee will increase.

3. Technology

• Technology refers to the methods and processes used in production. Advancements in technology often lead to increased efficiency and reduced costs.
• Impact on Supply:
  • Technological advancements: Generally lead to an increase in supply (supply curve shifts to the right). New technologies can reduce production costs, increase productivity, and allow firms to produce more at any given price.
• Example: The introduction of automated machinery in a factory can increase production speed and reduce labour costs, leading to an increase in supply.

4. Productivity

• Productivity is a measure of the efficiency of production. It is typically defined as the output per unit of input (e.g., output per worker-hour).
• Impact on Supply:
  • Increased productivity: Leads to an increase in supply (supply curve shifts to the right). Higher productivity means that firms can produce more output with the same amount of resources, effectively reducing costs per unit.
  • Decreased productivity: Leads to a decrease in supply (supply curve shifts to the left).
• Example: If workers become better trained and more efficient, productivity increases, leading to a higher supply of goods or services.

5. Climatic Conditions

• Climatic conditions can significantly impact the supply of agricultural products and other industries that rely on natural resources.
• Impact on Supply:
  • Favourable climatic conditions (e.g., good rainfall, sunny weather): Lead to an increase in the supply of agricultural products (supply curve shifts to the right).
  • Unfavourable climatic conditions (e.g., droughts, floods, frosts): Lead to a decrease in the supply of agricultural products (supply curve shifts to the left).
• Example: A severe drought can drastically reduce the supply of wheat, causing the supply curve to shift to the left.

Summary Table

EXAM TIP: When analyzing the impact of a non-price factor on supply, always explain why the supply curve shifts. Don’t just state that supply increases or decreases. Explain the mechanism through which the factor affects firms’ willingness or ability to supply. For example, “An increase in wages will increase firms’ costs of production, making them less willing to supply as much at any given price, leading to a decrease in supply (a leftward shift of the supply curve).”