IBEconomicsHLRevision Notes2. Microeconomics2.2 Supply2.2.2 Non-Price Determinants of Supply

Non-Price Determinants of Supply (HL IB Economics)

Revision Note

Steve Vorster

The Non-Price Determinants of Supply

  • There are several factors that will change the supply of a good/service, irrespective of the price level. Collectively these factors are called the non-price determinants of supply and include

    • Changes to the costs of production

    • Changes to indirect taxes and subsidies

    • Changes to technology

    • Changes to the number of firms

    • Weather events

    • Future price expectations

    • Goods in joint and competitive supply
       

  • Changes to any of the non-price determinants of supply shifts the entire supply curve (as opposed to a movement along the supply curve)

1-2-4--shifts-in-the-supply-curve_edexcel-al-economics

A graph that shows how changes to any of the non-price determinants of supply shifts the entire supply curve left or right, irrespective of the price level

  • E.g. If a firm's cost of production increases due to the increase in price of a key resource, then there will be a decrease in supply as the firm can now only afford to produce fewer products

    • This is a shift in supply from S to S1. The price remains unchanged at £7 but the supply has decreased from 10 to 2 units

An Explanation of how each of the Non-Price Determinants of Supply Shifts the Entire Supply
Curve at Every Price Level


Non-Price Determinant


Explanation


Condition


Shift


Condition


Shift


Changes to costs of production
(COP)

  • If the price of raw materials or other costs of production change, firms respond by changing supply


COP
Increases


S decreases, shifting left
(S→S1)


COP
Decreases


S increases, shifting right
(S→S2)


Indirect taxes

  • Any changes to indirect taxes change the costs of production for a firm and impact supply


Taxes Increase


S decreases, shifting left
(S→S1)


Taxes Decrease

 
S increases, shifting right
(S→S2)


Subsidies

  • Changes to producer subsidies directly impact the costs of production for the firm


Subsidy Increases


S increases, shifting right
(S→S2)


Subsidy Decreases

 
S decreases, shifting left
(S→S1)


New technology

  • New technology increases productivity and lowers costs of production

  • Ageing technology can have the opposite effect


Technology Increases


S increases, shifting right
(S→S2)


Technology Decreases


S decreases, shifting left
(S→S1))


Change in the number of firms in the industry

  • The entry and exit of firms into the market has a direct impact on the supply

  • E.g. If ten new firms start selling building materials in Hanoi, the supply of building material will increase


No. of Firms Increases


S increases, shifting right
(S→S2)


No. of Firms Decreases


S decreases, shifting left
(S→S1)


Weather events

  • Droughts or flooding can cause a supply shock in agricultural markets

  • A drought will cause supply to decrease. Unexpectedly good growing conditions can cause supply to increase


Drought


S decreases, shifting left
(S→S1)


Good Weather


S increases, shifting right
(S→S2)

Future price expectations

  • If firms expects the price of a good/service to increase in the future, they will start supplying more

  • If firms expects the price of a good/service to decrease in the future, they will start supplying less

Expectations price will rise

S Increases
Shifts Right
(S→S2)

Expectations price will fall

 S Decreases
Shifts Left
(S→S1)

Goods in joint supply

  • When there is an increase of supply of one good in joint supply (e.g. beef), possibly due to higher prices, there will be an increase in supply of the other good too (e.g. leather)

Supply of one good rises

S good A Increases

Shifts Right
(S→S2)

Supply of the other good rises

S good B Increases
Shifts Right
(S→S2)

Goods in competitive supply

  • Farmers can produce many goods which are competitive in supply

  • E.g. A farmer can grow wheat or potatoes. When they increase the supply of potatoes, the supply of wheat decreases

Supply of one good rises

S good A Increases

Shifts Right
(S→S2)

Supply of the other good falls

 S Decreases
Shifts Left
(S→S1)

Examiner Tip

Several of the non-price determinants of supply change the costs of production. However, be sure to explain each condition as its own point before linking it to the cost of production e.g. a change in indirect taxation.

A common error by students is to explain that a subsidy (for example, £3,000 subsidy for each electric vehicle produced) shifts the demand curve for electric vehicles to the right. This is incorrect. The subsidy will shift the supply curve to the right. Then due to the lower price, there will be a movement along the demand curve (extension of quantity demanded) to create a new market equilibrium.

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Steve Vorster

Author: Steve Vorster

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Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

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