Determinants of Supply & the Role of Time

You’ll be able to

Identify the determinants that shift supply and predict the direction
Explain why supply is more elastic in the long run
Distinguish a subsidy from a fall in input costs on the graph

Supply shifters

A change in the good's own price moves you along the supply curve. Everything else shifts it: input prices, technology, the number of sellers, expectations, taxes and subsidies, and for agricultural goods, weather. Lower input costs or better technology shift supply right — more is offered at every price. A per-unit tax shifts it left, because the firm needs a higher price to cover the same production plus the tax.

The supply shifters

Input prices · Technology · Taxes and subsidies · Number of sellers · Expectations · (weather, for agriculture)

Same structure as demand: own price moves along, everything else shifts.

Why time makes supply more elastic

In the very short run a firm cannot change its plant, so quantity barely responds to price — supply is inelastic. Given more time, existing firms expand, new firms enter, and capital is redeployed, so quantity responds much more — supply is elastic. This is why the same price rise produces a small quantity response this month and a large one over five years, and why the long-run consequences of a price control differ so much from the short-run ones.

Taxes and subsidies as vertical shifts

A per-unit tax shifts supply up (left) by exactly the amount of the tax — the vertical gap between the old and new curve is the tax. A per-unit subsidy shifts it down (right) by the subsidy. Reading the shift vertically rather than horizontally is what lets you find the tax amount off a graph, and it is how tax-incidence questions are set up.

Worked example

A government imposes a $3 per-unit tax on producers of a good. Describe the graph, and state who bears the tax if demand is highly inelastic.

1.Supply shifts up by $3 — the vertical distance between the two supply curves equals the tax.
2.Equilibrium quantity falls and the price consumers pay rises.
3.The price producers receive after the tax falls below the original price.
4.With demand highly inelastic, consumers barely reduce quantity, so producers can pass most of the tax through as a higher price.

Answer: Supply shifts up by $3, quantity falls, the consumer price rises and the producer's net price falls. With inelastic demand, most of the $3 is borne by consumers — the general rule being that the more inelastic side of the market bears more of the tax.

Watch out

A subsidy shifts supply right, not demand right, when it is paid to producers. A subsidy paid to consumers shifts demand right instead. Read who receives it before drawing.

Checkpoint

A technological improvement lowers the cost of producing a good. On the supply-and-demand graph:

Checkpoint

Supply is generally more elastic in the long run because:

Checkpoint

A per-unit tax of $4 is imposed on sellers. The vertical distance between the pre-tax and post-tax supply curves is:

On the exam

When a graph question involves a tax, label three prices: what consumers pay, what producers receive, and the original equilibrium. The gap between the first two is the tax, and tax incidence is read from how the original price sits between them.

Answer the 3 checkpoints as you read.