Chap6

• Factors affecting supply


  • Costs of production
  • Subsidies
  • Changes in technology
  • Natural factors
  • Prices of other goods
  • Indirect taxes
• Costs of production


  Wages, raw materials, rent, electricity
• Assuming price is fixed, if production costs rise

  Profits will fall, sellers will reduce supply
• Availability of resources


  Shortage in any of the factors of production (land, labour, capital) => production will be reduced and probably more expensive => supply will fall
• Subsidies


  Governments may give money to firms in the form of grants => Subsidy => encourage production & reduce costs => increase supply
• Changes in technology


  New technology => more efficient machines => lower production costs => increase supply
• Natural factors


  Weather, natural disasters => affect supply
• Good weather conditions


  Improve crop yields => increase supply => supply curve shift to the right
• Bad weather conditions


  Destroy crop yields => decrease supply => supply curve shift to the left
• Prices of other goods

  Some producers produce more than one good i.e. tomatoes and potatoes. A rise in the price of tomatoes will encourage producer to supply more tomatoes than potatoes => increase in the price of tomatoes => decreased supply of potatoes => supply curve of potatoes shift to the left
• An increase in costs of production


  Production less profitable => supply will fall => Supply curve will shift to the left
• A decrease in costs of production


  Production more profitable => supply will rise => Supply curve will shift to the right
• Indirect taxes


  Taxes imposed by government on spending not directly charged on the income of the consumer i.e. customs duties, excise duties, sales tax or value added tax (VAT)
• If there is an increase in indirect taxes

  The cost of firms is increased => less profit if selling prices cannot increase => decrease of supply => supply curve will shift to the left
• Ad valorem tax


  Tax levied as a % on price of good => not fixed, depends on price. The amount of tax increases when the quantity supplied increases, as a higher quantity supplied corresponds to a higher price on the supply curve. This means that at low prices the tax will be relatively little, but at higher prices the tax levied will be higher. When VAT increases => supply is reduced => costs do not increase proportionately to quantity => the supply curve will make a non-parallel shift to the left
• Specific or unit tax

  A lump sum tax per unit -fixed tax per unit irrespective of price i.e. excise duties. When VAT increases => supply is reduced => costs increase proportionately to quantity => the supply curve will make a parallel shift to the left