Change in Supply, Supply Schedule and its Relation to Price.

Let's talk about how to graph a change in supply. So a change in supply can occur for a number of reasons it could be that there's been a change in the number of suppliers may be new suppliers have entered the market, could be a change in the price of factors of production may be labor became cheaper or so forth, it could be that there was an advance in technology, for example, fracking dramatically increases the supply of natural gas or there could even be a change to the weather for example if a hurricane we're to hit Florida could reduce the supply of oranges. 


When we say that we have an increase in supply what we mean is that the supply curve is going to shift to the right. So let's say that we have our standard upward-sloping supply curve. So I'll call that S1 and then something happens that increases the supply, what that means is that we're gonna have a shift in the curve, the curve is going to shift to the right and we're gonna have an entirely new supply curve. Conversely, if the supply were to decrease what that means is that the curve is going to shift to the left and then we would have a new supply curve to the left.


I want to show you an example to make it a little bit easier to understand let's say that a tsunami hits the country of Costa Rica and destroys a number of coffee plantations. I hope that doesn't happen but let's say that it did. We could go and we could look at the quantity of coffee supplied before. So this is our supply schedule before the tsunami hits


At different prices, we could look and see what was the quantity that producers were willing to supply. So let's say for $1 a pound that coffee producers were willing to supply 3 million pounds of coffee or so forth. So we could put all these combinations together and we can actually map out our supply curve. Which we've talked about in previous articles. So we've got our supply curve here.


And now what we can do is we can say "Well, what's gonna happen now? That the tsunami wiped out a bunch of coffee plantations is that going to increase or is that going to decrease the supply of coffee?" Well, it's pretty clear in this example that it's going to decrease the supply of coffee. Because a bunch of coffee plantations got wiped out. That means that the curve is going to shift to the left but I want to show you why it's gonna shift to the left.


If we look at each price so let's look at $1, for example, used to be before the tsunami, the quantity that producers were willing to supply was 3 million pounds of coffee but now at $1 the producers are only willing to supply zero coffee, there now they're not willing to give any coffee at all. At a price of $2, they were willing to supply six million pounds of coffee and now they're only willing to supply three Million. So you see at each price the amount that they're willing to supply has decreased. Now that we've had this decrease in supply that these coffee plantations have been wiped out so what does that practically mean? That means that we're gonna draw a whole new supply curve. We're gonna draw an entirely new supply curve for the new supply schedule and so when we say that it shifts what we mean is we have a new supply curve and I'm gonna call that S2.


The reason it shifts to the left is that if we look at a price of $1 the quantity supplied was zero but we had to move it over because there's been this decrease in supply and so now we've had this shift in supply. Now you might be wondering about what would happen to the price of coffee? So what we would need to do is we would have to draw a demand curve. Now I don't have a demand schedule here that I've put together, I'm just gonna draw a generic demand curve.


Let's just say that that's our demand curve. So now what we can do is we can go so our original equilibrium would have been right here at E1 because we've got our demand and then we had S1 which was our original supply curve before the tsunami. Our price I'll call this P1 about there around $3 and then let's say there would have been our quantity so it's called that Q1 so we were originally here at our equilibrium but now we look at S2 the new supply curve because of the tsunami hit we have a new supply curve but the demand curve doesn't change. So now we have the new equilibrium is here at E2. Now let's see what happens, now Q2 is the new quantity in equilibrium and P2 is the new price so what we see is that this decrease in supply has actually increased the price. So the equilibrium price has increased in the equilibrium quantity has gone down.

Post a Comment

0 Comments