2.2.2 Non-Price Determinants of Supply

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)

Exam 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.

SL IB Economics

Revision Notes

2.2.2 Non-Price Determinants of Supply

The Non-Price Determinants of Supply

Exam Tip

Author: Steve

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