Supply changes can affect on demand in positive and negative way. In this post, we will analyze 6 factors of supply shifters and how they affect on a new equilibrium point in the market.
Six Demand Shifter Factors are as follows;
- Number of sellers – more sellers = more supply, fewer sellers = less supply
- New technology – new technology = more supply
- Resource price – high resource price = low supply, low recourse price = high supply
- Taxes and Subsidies – More taxes = low supply, Less taxes = more supply, More subsidies = more supply, less subsidies = less supply
- Expected price in the future – This is what producers predict what sells of product will look like and they will use the prediction to plan how they sell products in the future. If they predict that the price of product will be high in the future, they will stock supply in order to sell in the future. On the other than, if they think the future price is low, the will increase supply to get more money from sales before the price drops. more expectation (more expensive) = less supply now, less expectation (less expensive) = more supply now. This is similar to oil price, when a lot of companies expect high dollars per barrel of oil in the future, they tend to keep supply in the stock and sell later. This will reduce current supply and it will be more supply in the future.
- Prices of other products the company could make – the company sometimes makes more profit on another product than one that they currently produce. The company will move resource to produce the new product that will generate more income so the supply of current product drops.
Increase in Supply
When companies produce more products to the market and there is no demand change. This will result in a new equilibrium point which indicates an increase in supply but a decrease in price of a product. The Figure 1 illustrates a new equilibrium price of 50$ and a new equilibrium quantity of 35 units. This level will maintain until the supply goes down to the former level.
Figure 1 – Increase in Supply
Decrease in Supply
When companies are unable to supply the same amount of products to the market and there is no demand change. This will result in a new equilibrium point which indicates a decrease in supply but an increase in price of a product. This will shift results to a new equilibrium price of 70$ and a new equilibrium quantity of 25 units as shown in Figure 2. This level will maintain until the supply goes up to the previous level.
Figure 2 – Decrease in Supply
Thomas Sowell (2007) Basic economics: A Common Sense Guide to the Economy, New York, New York, USA: Basic Books.