What is a Change in Supply?
Change in supply refers to a shift, either to the left or right, in the entire price-quantity relationship that defines a supply curve.
- Change in supply refers to a shift, either to the left or right, in the entire price-quantity relationship that defines a supply curve.
- Essentially, a change in supply is an increase or decrease in the quantity supplied that is paired with a higher or lower supply price.
- A key distinction is that a change in supply is not to be confused with a change in the quantity supplied.
Understanding Change in Supply
A change in supply is an economic term that describes when the suppliers of a given good or service alters production or output. A change in supply can occur as a result of new technologies, such as more efficient or less expensive production processes, or a change in the number of competitors in the market.
A change in supply leads to a shift in the supply curve, which causes an imbalance in the market that is corrected by changing prices and demand. An increase in the change in supply shifts the supply curve to the right, while a decrease in the change in supply shifts the supply curve left. Essentially, there is an increase or decrease in the quantity supplied that is paired with a higher or lower supply price.
A key distinction is that a change in supply is not to be confused with a change in the quantity supplied. The former causes a shift in the entire supply curve, while the latter results in movement along the existing supply curve.
The general consensus amongst economists is that these are the primary factors that cause a change in supply, which necessitates the shifting of the supply curve:
- Number of sellers
- Expectations of sellers
- Price of raw materials
- Other prices
For example, if a new technology reduces the cost of gaming console production for manufacturers, according to the law of supply, the output of consoles will increase. With more output in the market, the price of consoles is likely to fall, creating greater demand in the marketplace and higher overall sales of consoles. The technological advancement has caused a change in supply.
Supply and Demand Curves
The effects of changing supply and demand are found by plotting the two variables on a graph. The horizontal X-axis represents quantity and the vertical Y-axis represents price. The supply and demand curves intersect to form an "X" in the middle of the graph; the supply curve points upward and to the right, while the demand curve points downward and to the right. Where the two curves intersect is the price and quantity, based on current levels of supply and demand.
A positive change in supply when demand is constant shifts the supply curve to the right, which results in an intersection that yields lower prices and higher quantity. A negative change in supply shifts the curve to the left, causing prices to rise and the quantity to decrease.
Change in Supply Example
During the early 2010s, the development of hydraulic fracturing ("fracking") as a method to extract oil from shale rock formations in North America caused a positive change in supply in the oil market. Non-OPEC oil production rose by over one million barrels per day as most of the oil came from fracking in North America.
Because of the increase in the supply of oil, the per-barrel price of oil, which had reached an all-time high of $147 in 2008, plunged as low as $27 in Feb. 2016. Economists predicted that lower prices would create greater demand for oil, although this demand was tempered by deteriorating economic conditions in many parts of the world.