{"id":533,"date":"2016-10-15T16:12:49","date_gmt":"2016-10-15T20:12:49","guid":{"rendered":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/?post_type=chapter&#038;p=533"},"modified":"2017-05-20T14:36:39","modified_gmt":"2017-05-20T18:36:39","slug":"other-determinants-of-supply","status":"publish","type":"chapter","link":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/chapter\/other-determinants-of-supply\/","title":{"raw":"3.5 Other Determinants of Supply","rendered":"3.5 Other Determinants of Supply"},"content":{"raw":"<div class=\"bcc-box bcc-highlight\">\r\n<h3 itemprop=\"educationalUse\">Learning Objectives<\/h3>\r\nBy the end of this section, you will be able to:\r\n<ul>\r\n \t<li>Understand\u00a0the difference between supply\u00a0and quantity\u00a0supplied<\/li>\r\n \t<li>Know the four main determinants of\u00a0supply<\/li>\r\n \t<li>Explain supply\u00a0shifts from both horizontal and vertical perspectives<\/li>\r\n \t<li>Know the difference between explicit and opportunity costs<\/li>\r\n<\/ul>\r\n<\/div>\r\n&nbsp;\r\n\r\n[caption id=\"attachment_653\" align=\"aligncenter\" width=\"932\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/cupcake-machine.jpg\" alt=\"cupcake-machine\" width=\"932\" height=\"525\" class=\"wp-image-653\" \/> (Credit: EZ Frost)[\/caption]\r\n<h3>It's as Easy as Cake<\/h3>\r\nIn section 3.4 we looked at the impact of price on the supply curve, but there are many other factors that affect a company\u2019s decision to produce. For example, new innovations are always coming out to make cake decorating and baking easier, whether it is machines like the one shown above, or faster and better mixers. These inventions save time and energy at different levels of production. External forces like these impact our supply curve. The four supply shocks we will examine in detail include:\r\n<ol>\r\n \t<li>Input Prices<\/li>\r\n \t<li>Technology<\/li>\r\n \t<li>Expectations<\/li>\r\n \t<li>Number of Producers<\/li>\r\n<\/ol>\r\nWhereas changes in price change quantity supplied, these factors shift supply. This is distinctly different from changes in quantity supplied as these shocks\u00a0affect the price-quantity interaction at every point on our curve.\r\n<div class=\"textbox shaded\">\r\n<h3>Is supply the same as quantity supplied?<\/h3>\r\n<p style=\"margin-top: 0cm;background: #EEEEEE\"><span style=\"font-family: Georgia;color: #333333\">As with demand and quantity demanded, supply\u00a0is not the same as quantity supplied. When economists talk about supply, they mean the relationship between a range of prices and the distinct quantities supplied, as illustrated by a supply\u00a0curve. When economists talk about quantity supplied, they mean only a certain point on the supply\u00a0curve.\u00a0Like demand, this means a change in quantity supplied\u00a0is very different than a change in supply.<\/span><\/p>\r\n<p style=\"margin-top: 0cm;background: #EEEEEE\"><strong><span style=\"font-family: Georgia;color: #333333\">A change in supply<\/span><\/strong><span style=\"font-family: Georgia;color: #333333\">\u00a0refers to a<span class=\"apple-converted-space\">\u00a0<\/span><strong><span style=\"font-family: Georgia\">shift<\/span><\/strong><span class=\"apple-converted-space\">\u00a0<\/span>in the supply\u00a0curve, affecting the whole diagram and every\u00a0interaction between price and quantity<\/span><\/p>\r\n<p style=\"margin-top: 0cm;background: #EEEEEE\"><strong><span style=\"font-family: Georgia;color: #333333\">A change in quantity supplied\u00a0<\/span><\/strong><span style=\"font-family: Georgia;color: #333333\">refers to a\u00a0<strong><span style=\"font-family: Georgia\">movement along<\/span><\/strong><span class=\"apple-converted-space\">\u00a0<\/span>the supply\u00a0curve, exploring different points on the same curve.<\/span><\/p>\r\n<p style=\"margin-top: 0cm;background: #EEEEEE\"><span style=\"font-family: Georgia;color: #333333\">We examined changes in quantity supplied\u00a0in Topic 3.4.\u00a0In this section, we discuss changes in supply.<\/span><\/p>\r\n\r\n<\/div>\r\n<h2>Input Prices<\/h2>\r\n<span style=\"font-family: Georgia;color: #333333\">Perhaps the most obvious shock to the supply curve is the cost of inputs. Also known as 'Factors of Production', these are\u00a0the combination of labor, materials, and machinery used to produce goods and services. Our cupcake supply curve was based on the assumption of specific implicit and explicit costs which are\u00a0prone to change. Any changes to these costs will affect our marginal costs at every point.<\/span>\r\n<h3>Changes in Explicit\u00a0Costs<\/h3>\r\n<span style=\"font-family: Georgia;color: #333333\">Changes in explicit costs are the easiest to conceptualize. We determined that the explicit cost of our cupcake supplies was around $0.50 each. What if icing sugar, an input to cupcakes, becomes more expensive? This will raise our marginal costs at all points of production, causing an upward shift in our supply curve. <\/span>\r\n<h3>Changes in Opportunity Costs<\/h3>\r\n<span style=\"font-family: Georgia;color: #333333\">Opportunity cost is more of an abstract concept to think about in terms of input prices. Essentially, if cookies become more profitable to produce, our supply model\u00a0considers the higher opportunity cost as an increase in\u00a0our cost of making cupcakes. Suppose the market price for cookies increases from the original $0.50\u00a0to $1.00. Now, our MC will be as follows:<\/span>\r\n\r\n<span style=\"font-family: Georgia;color: #333333\">MC of 1st 5 cupcakes = $0.5 (explicit) + $0.8 (implicit) =<span class=\"apple-converted-space\">\u00a0<\/span><strong><span style=\"font-family: Georgia\">$1.3<\/span><\/strong><span class=\"apple-converted-space\"><b>\u00a0<\/b><\/span>(increased from $0.9)<\/span>\r\n\r\n<span style=\"font-family: Georgia;color: #333333\">MC of 2nd 5 cupcakes = $0.5 (explicit) + $1.6 (implicit) =<span class=\"apple-converted-space\">\u00a0<\/span><strong><span style=\"font-family: Georgia\">$2.1\u00a0<\/span><\/strong>(increased from $1.3)<\/span>\r\n\r\n<span style=\"font-family: Georgia;color: #333333\">MC of 3rd 5 cupcakes = $0.5 (explicit) + $2.4 (implicit) =<span class=\"apple-converted-space\">\u00a0<\/span><strong><span style=\"font-family: Georgia\">$2.9\u00a0<\/span><\/strong>(increased from $1.7)<\/span>\r\n\r\n<span style=\"font-family: Georgia;color: #333333\">Notice this increase in marginal cost occurs at<span class=\"apple-converted-space\">\u00a0<\/span><strong><span style=\"font-family: Georgia\">all levels,\u00a0<\/span><\/strong>meaning the change will shift the entire supply, changing the quantity supplied at every point.<\/span>\r\n<div class=\"textbox shaded\">*For an interesting exercise, think about how a price change to an input for\u00a0<strong>both\u00a0<\/strong>cookies and cupcakes would affect production. On one hand, explicit costs would be higher, but opportunity costs would be lower\u00a0as cookies would be less\u00a0profitable. Note from now on, we will generally talk about input costs as increasing or decreasing (rather than looking at explicit and implicit costs) to simplify our analysis.<\/div>\r\n<span style=\"font-family: Georgia;color: #333333\">How does the supply curve actually change? In our discussion of demand, we explained that you could view a demand shift as vertical, as consumers\u2019 willingness to pay changes at every quantity demanded; or as horizontal, as the amount consumers buy changes at every price level. There is a similar process for supply.<\/span>\r\n<h3>Vertical Shift - Figure 3.5a<\/h3>\r\n<span style=\"font-family: Georgia;color: #333333\">The first way to view a shift\u00a0in supply is as a vertical shift. Recall that supply represents the producer\u2019s MC at each point of production. Assuming that in the original supply curve our MC of producing 15 units is $1.60, if costs increase by a dollar,\u00a0we will see the marginal cost increase to $2.60. Since input prices increase by a dollar regardless of our production level, the entire curve will shift up by $1.00.<\/span>\r\n\r\n[caption id=\"attachment_656\" align=\"aligncenter\" width=\"520\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5b.jpg\" width=\"520\" height=\"431\" class=\"wp-image-656 size-full\" \/> Figure 3.5a[\/caption]\r\n<h3>Horizontal Shift - Figure 3.5b<\/h3>\r\n<span style=\"font-family: Georgia;color: #333333\">The next way to view a supply shift\u00a0is slightly less intuitive. In Figure 3.5b, when the price of cupcakes is $1.80, our quantity supplied is equal to five cupcakes. Consider how this will change with a $1.00 decrease in input prices. Originally, we produced 5 cupcakes because our price was equal to marginal costs at that level When our costs fall, our price is still\u00a0$1.80, but\u00a0our costs are $0.90. Since P&gt;MC, it is efficient to produce more than 5 units. Using marginal analysis, we find it is efficient to produce 17 units at this price.<\/span>\r\n\r\n<span style=\"font-family: Georgia;color: #333333\">Whereas before, it was only viable to produce 5 units at the price of $1.80, we can now produce up to 17 units efficiently. This causes the supply curve to shift right.<\/span>\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n[caption id=\"attachment_659\" align=\"aligncenter\" width=\"520\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5c-1.jpg\" width=\"520\" height=\"431\" class=\"wp-image-659 size-full\" \/> Figure 3.5b[\/caption]\r\n\r\nMost shocks will cause a uniform shift as can be explained vertically or horizontally. Technology, expectations, and the number of producers will all shift the supply curve in the same way as depicted.\r\n<h2>Technology<\/h2>\r\nAs mentioned at the beginning of the section, changes in technology\u00a0will also shift the supply curve. Why is that the case? Technology changes have a direct impact on the cost of production. If suddenly a new innovation allows you to cut your work time in half, you will cut down your costs of labor. If technology allows you to conserve\u00a0wasted resources, then your input prices will decrease,\u00a0These changes will increase supply, shifting the curve to the right. <strong>Technological Decay<\/strong> is a less common case where technological progress is reversed. What if the city\u00a0banned the use of a certain cupcake icing machine\u00a0because the noise was bothering other residents? This would cause you to go back to the less efficient practice of icing by hand, thereby increasing your costs.\u00a0In summary:\r\n<ul>\r\n \t<li><strong>Improvements<\/strong>\u00a0in technology will lower costs of production and\u00a0<strong>increase supply<\/strong><\/li>\r\n \t<li><strong>Decay<\/strong>\u00a0in technology will increase costs of production and\u00a0<strong>decrease supply<\/strong><\/li>\r\n<\/ul>\r\n<h2>Expectations<\/h2>\r\nLike demand, expectations of the supply price affect\u00a0production decisions. Production decisions are a lot like\u00a0playing the stock market; if we are producing cupcakes and cookies to sell to the store tomorrow, we have to produce based on the current, incomplete knowledge we have about those prices. Normally, you will be confident that these prices will stay relatively stable, but if you have reason to believe the prices of cupcakes will drastically rise in the morning, you may devote more of your attention to producing them. Expectations are usually based on some form of evidence or signal and can cause supply shifts quite suddenly. In summary:\r\n<ul>\r\n \t<li>If the firm expects\u00a0<strong>prices to rise,<\/strong>\u00a0supply will <strong>increase<\/strong><\/li>\r\n \t<li>If the firm expects\u00a0<strong>prices to fall,<\/strong>\u00a0supply will<strong> decrease<\/strong><\/li>\r\n<\/ul>\r\n<h2>Number of Producers<\/h2>\r\nThe final determinant of supply is the number of producers. So far, we have examined just one firm. Recall in section 3.3 we showed that the competitive market is characterized by many potential buyers, and added up individual demand curves to produce aggregate demand. Likewise, the market is made up of many other producers. By adding all the suppliers together, we get <strong>aggregate supply.<\/strong> This can affect total supply. If for example, four new firms enter the cupcake market, whereas Alaythia Cakes\u00a0was producing just 5 cupcakes, now the firms each produce 5 cupcakes for a total of 25 (assuming that the individual supply curves are the same, which need not be the case). In summary:\r\n<ul>\r\n \t<li>When more<strong>\u00a0<\/strong><strong>firms enter<\/strong>\u00a0the market,\u00a0<strong>supply will increase<\/strong><\/li>\r\n \t<li>When\u00a0<strong>firms leave<\/strong>\u00a0the market,\u00a0<strong>supply will decrease<\/strong><\/li>\r\n<\/ul>\r\n<h2>Summary<\/h2>\r\n<span style=\"font-family: Georgia;color: #333333\">The four supply shocks have been summarized in the table below. Once again, the best way to learn these shifts is not to memorize them, but to practice shifts on the diagram to view their effects.<\/span>\r\n\r\n[caption id=\"attachment_660\" align=\"aligncenter\" width=\"864\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2016-10-30-at-4.44.46-PM.png\" width=\"864\" height=\"242\" class=\"wp-image-660\" \/> Figure 3.5c[\/caption]\r\n\r\n<div class=\"textbox\">\r\n<h2>Glossary<\/h2>\r\n<dl id=\"fs-idp41787328\" class=\"definition\">\r\n \t<dt><strong>Aggregate Supply<\/strong><\/dt>\r\n \t<dd id=\"fs-idp35020496\"><em>total of all goods and services (including exports and imports) supplied at every price level, within a national economy during a given period. Also called total output<\/em><\/dd>\r\n<\/dl>\r\n<dl id=\"fs-idm51600048\" class=\"definition\">\r\n \t<dt><strong>Explicit Costs<\/strong><\/dt>\r\n \t<dd id=\"fs-idp17805888\"><em>direct costs of production such as rent, salaries, wages, or other input costs. Easily recognizable for classification and recording<\/em><\/dd>\r\n<\/dl>\r\n<dl id=\"fs-idm51600048\" class=\"definition\">\r\n \t<dt><strong>Factors of Production<\/strong><\/dt>\r\n \t<dd id=\"fs-idp17805888\"><em>the combination of labor, materials, and machinery that is used to produce goods and services; also called inputs<\/em><\/dd>\r\n<\/dl>\r\n<dl id=\"fs-idm51600048\" class=\"definition\">\r\n \t<dt><strong>Implicit Costs<\/strong><\/dt>\r\n \t<dd id=\"fs-idp17805888\"><em>the opportunity costs of an action, associated with an actions trade-offs<\/em><\/dd>\r\n<\/dl>\r\n<dl id=\"fs-idm51600048\" class=\"definition\">\r\n \t<dt><strong>Shift in Supply<\/strong><\/dt>\r\n \t<dd id=\"fs-idp17805888\"><em>when a change in some economic factor (other than price) causes a different quantity to be supplied at every price<\/em><\/dd>\r\n<\/dl>\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\">\r\n<h3 itemprop=\"educationalUse\">Exercises 3.5<\/h3>\r\n<strong>1.<\/strong> Which of the following will NOT shift the market supply curve of good X?\r\n\r\na) A change in the cost of inputs used to produce good X.\r\nb) A change in the technology used to produce X.\r\nc) A change number of sellers of good X.\r\nd) A change in the price of good X.\r\n\r\n&nbsp;\r\n\r\n<strong>2.<\/strong> Which of the following is NOT a determinant of the supply of good X?\r\n\r\na) The cost of inputs used to produce good X.\r\nb) The technology used to produce X.\r\nc) The number of sellers of good X.\r\nd) All of the above are determinants of the supply of good X.\r\n\r\n&nbsp;\r\n\r\nThe following TWO questions refer to the diagram below.\r\n\r\n<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2017-01-14-at-6.05.33-PM.png\" alt=\"screen-shot-2017-01-14-at-6-05-33-pm\" width=\"285\" height=\"247\" class=\"alignnone size-full wp-image-1016\" \/>\r\n\r\n<strong>3.<\/strong> At what price will quantity supplied equal 3 units?\r\n\r\na) $1.\r\nb) $2.\r\nc) $3.\r\nd) $4.\r\n\r\n&nbsp;\r\n\r\n<strong>4.<\/strong> At what price will producer surplus equal $2?\r\n\r\na) $1.\r\nb) $2.\r\nc) $3.\r\nd) $4.\r\n\r\n&nbsp;\r\n\r\n<strong>5.<\/strong> A decrease in supply is, graphically, represented by:\r\n\r\na) A leftward shift in the supply curve.\r\nb) A rightward shift in the supply curve.\r\nc) A movement up and to the right along a supply curve.\r\nd) A movement down and to the left along a supply curve.\r\n\r\n&nbsp;\r\n\r\n<strong>6.<\/strong> Which of the following is NOT a determinant of the supply of good X?\r\n\r\na) The cost of labor used to produce good X.\r\nb) The price of good X.\r\nc) The income of consumers who buy good X.\r\nd) The number of sellers of good X.\r\n\r\n&nbsp;\r\n\r\n<strong>7.<\/strong> Which of the following is NOT a determinant of the supply of good X?\r\n\r\na) The cost of labor used to produce good X.\r\nb) Consumer preferences.\r\nc) Technology.\r\nd) All of the above are determinants of the supply of good X.\r\n\r\n&nbsp;\r\n\r\n<strong>8.<\/strong> Martin is selling his viola. The minimum amount he needs to be paid for the viola is $15,500. He find a buyer for who is willing to pay $22,400, but this buyer insists that Martin pays for delivery of the viola. The cost of delivery is $700. Martin\u2019s producer surplus from selling his viola is equal to _____.\r\n\r\na) $14,800.\r\nb) $7,600.\r\nc) $6,900.\r\nd) $6,200.\r\n\r\n&nbsp;\r\n\r\n<strong>9.<\/strong> Which of the following statements about inferior goods is\/are FALSE?\r\n\r\nI. Inferior goods are those that we will never buy, no matter how cheap they are.\r\nII. Inferior goods are those that we buy more of, if we become poorer.\r\nIII. Inferior goods are those that we buy more of, if we become richer.\r\n\r\na) I only\r\nb) III only.\r\nc) I and III only.\r\nd) I, II, and III.\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\n&nbsp;","rendered":"<div class=\"bcc-box bcc-highlight\">\n<h3 itemprop=\"educationalUse\">Learning Objectives<\/h3>\n<p>By the end of this section, you will be able to:<\/p>\n<ul>\n<li>Understand\u00a0the difference between supply\u00a0and quantity\u00a0supplied<\/li>\n<li>Know the four main determinants of\u00a0supply<\/li>\n<li>Explain supply\u00a0shifts from both horizontal and vertical perspectives<\/li>\n<li>Know the difference between explicit and opportunity costs<\/li>\n<\/ul>\n<\/div>\n<p>&nbsp;<\/p>\n<figure id=\"attachment_653\" aria-describedby=\"caption-attachment-653\" style=\"width: 932px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/cupcake-machine.jpg\" alt=\"cupcake-machine\" width=\"932\" height=\"525\" class=\"wp-image-653\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/cupcake-machine.jpg 1280w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/cupcake-machine-300x169.jpg 300w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/cupcake-machine-768x432.jpg 768w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/cupcake-machine-1024x576.jpg 1024w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/cupcake-machine-65x37.jpg 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/cupcake-machine-225x127.jpg 225w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/cupcake-machine-350x197.jpg 350w\" sizes=\"auto, (max-width: 932px) 100vw, 932px\" \/><figcaption id=\"caption-attachment-653\" class=\"wp-caption-text\">(Credit: EZ Frost)<\/figcaption><\/figure>\n<h3>It&#8217;s as Easy as Cake<\/h3>\n<p>In section 3.4 we looked at the impact of price on the supply curve, but there are many other factors that affect a company\u2019s decision to produce. For example, new innovations are always coming out to make cake decorating and baking easier, whether it is machines like the one shown above, or faster and better mixers. These inventions save time and energy at different levels of production. External forces like these impact our supply curve. The four supply shocks we will examine in detail include:<\/p>\n<ol>\n<li>Input Prices<\/li>\n<li>Technology<\/li>\n<li>Expectations<\/li>\n<li>Number of Producers<\/li>\n<\/ol>\n<p>Whereas changes in price change quantity supplied, these factors shift supply. This is distinctly different from changes in quantity supplied as these shocks\u00a0affect the price-quantity interaction at every point on our curve.<\/p>\n<div class=\"textbox shaded\">\n<h3>Is supply the same as quantity supplied?<\/h3>\n<p style=\"margin-top: 0cm;background: #EEEEEE\"><span style=\"font-family: Georgia;color: #333333\">As with demand and quantity demanded, supply\u00a0is not the same as quantity supplied. When economists talk about supply, they mean the relationship between a range of prices and the distinct quantities supplied, as illustrated by a supply\u00a0curve. When economists talk about quantity supplied, they mean only a certain point on the supply\u00a0curve.\u00a0Like demand, this means a change in quantity supplied\u00a0is very different than a change in supply.<\/span><\/p>\n<p style=\"margin-top: 0cm;background: #EEEEEE\"><strong><span style=\"font-family: Georgia;color: #333333\">A change in supply<\/span><\/strong><span style=\"font-family: Georgia;color: #333333\">\u00a0refers to a<span class=\"apple-converted-space\">\u00a0<\/span><strong><span style=\"font-family: Georgia\">shift<\/span><\/strong><span class=\"apple-converted-space\">\u00a0<\/span>in the supply\u00a0curve, affecting the whole diagram and every\u00a0interaction between price and quantity<\/span><\/p>\n<p style=\"margin-top: 0cm;background: #EEEEEE\"><strong><span style=\"font-family: Georgia;color: #333333\">A change in quantity supplied\u00a0<\/span><\/strong><span style=\"font-family: Georgia;color: #333333\">refers to a\u00a0<strong><span style=\"font-family: Georgia\">movement along<\/span><\/strong><span class=\"apple-converted-space\">\u00a0<\/span>the supply\u00a0curve, exploring different points on the same curve.<\/span><\/p>\n<p style=\"margin-top: 0cm;background: #EEEEEE\"><span style=\"font-family: Georgia;color: #333333\">We examined changes in quantity supplied\u00a0in Topic 3.4.\u00a0In this section, we discuss changes in supply.<\/span><\/p>\n<\/div>\n<h2>Input Prices<\/h2>\n<p><span style=\"font-family: Georgia;color: #333333\">Perhaps the most obvious shock to the supply curve is the cost of inputs. Also known as &#8216;Factors of Production&#8217;, these are\u00a0the combination of labor, materials, and machinery used to produce goods and services. Our cupcake supply curve was based on the assumption of specific implicit and explicit costs which are\u00a0prone to change. Any changes to these costs will affect our marginal costs at every point.<\/span><\/p>\n<h3>Changes in Explicit\u00a0Costs<\/h3>\n<p><span style=\"font-family: Georgia;color: #333333\">Changes in explicit costs are the easiest to conceptualize. We determined that the explicit cost of our cupcake supplies was around $0.50 each. What if icing sugar, an input to cupcakes, becomes more expensive? This will raise our marginal costs at all points of production, causing an upward shift in our supply curve. <\/span><\/p>\n<h3>Changes in Opportunity Costs<\/h3>\n<p><span style=\"font-family: Georgia;color: #333333\">Opportunity cost is more of an abstract concept to think about in terms of input prices. Essentially, if cookies become more profitable to produce, our supply model\u00a0considers the higher opportunity cost as an increase in\u00a0our cost of making cupcakes. Suppose the market price for cookies increases from the original $0.50\u00a0to $1.00. Now, our MC will be as follows:<\/span><\/p>\n<p><span style=\"font-family: Georgia;color: #333333\">MC of 1st 5 cupcakes = $0.5 (explicit) + $0.8 (implicit) =<span class=\"apple-converted-space\">\u00a0<\/span><strong><span style=\"font-family: Georgia\">$1.3<\/span><\/strong><span class=\"apple-converted-space\"><b>\u00a0<\/b><\/span>(increased from $0.9)<\/span><\/p>\n<p><span style=\"font-family: Georgia;color: #333333\">MC of 2nd 5 cupcakes = $0.5 (explicit) + $1.6 (implicit) =<span class=\"apple-converted-space\">\u00a0<\/span><strong><span style=\"font-family: Georgia\">$2.1\u00a0<\/span><\/strong>(increased from $1.3)<\/span><\/p>\n<p><span style=\"font-family: Georgia;color: #333333\">MC of 3rd 5 cupcakes = $0.5 (explicit) + $2.4 (implicit) =<span class=\"apple-converted-space\">\u00a0<\/span><strong><span style=\"font-family: Georgia\">$2.9\u00a0<\/span><\/strong>(increased from $1.7)<\/span><\/p>\n<p><span style=\"font-family: Georgia;color: #333333\">Notice this increase in marginal cost occurs at<span class=\"apple-converted-space\">\u00a0<\/span><strong><span style=\"font-family: Georgia\">all levels,\u00a0<\/span><\/strong>meaning the change will shift the entire supply, changing the quantity supplied at every point.<\/span><\/p>\n<div class=\"textbox shaded\">*For an interesting exercise, think about how a price change to an input for\u00a0<strong>both\u00a0<\/strong>cookies and cupcakes would affect production. On one hand, explicit costs would be higher, but opportunity costs would be lower\u00a0as cookies would be less\u00a0profitable. Note from now on, we will generally talk about input costs as increasing or decreasing (rather than looking at explicit and implicit costs) to simplify our analysis.<\/div>\n<p><span style=\"font-family: Georgia;color: #333333\">How does the supply curve actually change? In our discussion of demand, we explained that you could view a demand shift as vertical, as consumers\u2019 willingness to pay changes at every quantity demanded; or as horizontal, as the amount consumers buy changes at every price level. There is a similar process for supply.<\/span><\/p>\n<h3>Vertical Shift &#8211; Figure 3.5a<\/h3>\n<p><span style=\"font-family: Georgia;color: #333333\">The first way to view a shift\u00a0in supply is as a vertical shift. Recall that supply represents the producer\u2019s MC at each point of production. Assuming that in the original supply curve our MC of producing 15 units is $1.60, if costs increase by a dollar,\u00a0we will see the marginal cost increase to $2.60. Since input prices increase by a dollar regardless of our production level, the entire curve will shift up by $1.00.<\/span><\/p>\n<figure id=\"attachment_656\" aria-describedby=\"caption-attachment-656\" style=\"width: 520px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5b.jpg\" width=\"520\" height=\"431\" class=\"wp-image-656 size-full\" alt=\"image\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5b.jpg 520w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5b-300x249.jpg 300w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5b-65x54.jpg 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5b-225x186.jpg 225w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5b-350x290.jpg 350w\" sizes=\"auto, (max-width: 520px) 100vw, 520px\" \/><figcaption id=\"caption-attachment-656\" class=\"wp-caption-text\">Figure 3.5a<\/figcaption><\/figure>\n<h3>Horizontal Shift &#8211; Figure 3.5b<\/h3>\n<p><span style=\"font-family: Georgia;color: #333333\">The next way to view a supply shift\u00a0is slightly less intuitive. In Figure 3.5b, when the price of cupcakes is $1.80, our quantity supplied is equal to five cupcakes. Consider how this will change with a $1.00 decrease in input prices. Originally, we produced 5 cupcakes because our price was equal to marginal costs at that level When our costs fall, our price is still\u00a0$1.80, but\u00a0our costs are $0.90. Since P&gt;MC, it is efficient to produce more than 5 units. Using marginal analysis, we find it is efficient to produce 17 units at this price.<\/span><\/p>\n<p><span style=\"font-family: Georgia;color: #333333\">Whereas before, it was only viable to produce 5 units at the price of $1.80, we can now produce up to 17 units efficiently. This causes the supply curve to shift right.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<figure id=\"attachment_659\" aria-describedby=\"caption-attachment-659\" style=\"width: 520px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5c-1.jpg\" width=\"520\" height=\"431\" class=\"wp-image-659 size-full\" alt=\"image\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5c-1.jpg 520w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5c-1-300x249.jpg 300w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5c-1-65x54.jpg 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5c-1-225x186.jpg 225w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Figure-3.5c-1-350x290.jpg 350w\" sizes=\"auto, (max-width: 520px) 100vw, 520px\" \/><figcaption id=\"caption-attachment-659\" class=\"wp-caption-text\">Figure 3.5b<\/figcaption><\/figure>\n<p>Most shocks will cause a uniform shift as can be explained vertically or horizontally. Technology, expectations, and the number of producers will all shift the supply curve in the same way as depicted.<\/p>\n<h2>Technology<\/h2>\n<p>As mentioned at the beginning of the section, changes in technology\u00a0will also shift the supply curve. Why is that the case? Technology changes have a direct impact on the cost of production. If suddenly a new innovation allows you to cut your work time in half, you will cut down your costs of labor. If technology allows you to conserve\u00a0wasted resources, then your input prices will decrease,\u00a0These changes will increase supply, shifting the curve to the right. <strong>Technological Decay<\/strong> is a less common case where technological progress is reversed. What if the city\u00a0banned the use of a certain cupcake icing machine\u00a0because the noise was bothering other residents? This would cause you to go back to the less efficient practice of icing by hand, thereby increasing your costs.\u00a0In summary:<\/p>\n<ul>\n<li><strong>Improvements<\/strong>\u00a0in technology will lower costs of production and\u00a0<strong>increase supply<\/strong><\/li>\n<li><strong>Decay<\/strong>\u00a0in technology will increase costs of production and\u00a0<strong>decrease supply<\/strong><\/li>\n<\/ul>\n<h2>Expectations<\/h2>\n<p>Like demand, expectations of the supply price affect\u00a0production decisions. Production decisions are a lot like\u00a0playing the stock market; if we are producing cupcakes and cookies to sell to the store tomorrow, we have to produce based on the current, incomplete knowledge we have about those prices. Normally, you will be confident that these prices will stay relatively stable, but if you have reason to believe the prices of cupcakes will drastically rise in the morning, you may devote more of your attention to producing them. Expectations are usually based on some form of evidence or signal and can cause supply shifts quite suddenly. In summary:<\/p>\n<ul>\n<li>If the firm expects\u00a0<strong>prices to rise,<\/strong>\u00a0supply will <strong>increase<\/strong><\/li>\n<li>If the firm expects\u00a0<strong>prices to fall,<\/strong>\u00a0supply will<strong> decrease<\/strong><\/li>\n<\/ul>\n<h2>Number of Producers<\/h2>\n<p>The final determinant of supply is the number of producers. So far, we have examined just one firm. Recall in section 3.3 we showed that the competitive market is characterized by many potential buyers, and added up individual demand curves to produce aggregate demand. Likewise, the market is made up of many other producers. By adding all the suppliers together, we get <strong>aggregate supply.<\/strong> This can affect total supply. If for example, four new firms enter the cupcake market, whereas Alaythia Cakes\u00a0was producing just 5 cupcakes, now the firms each produce 5 cupcakes for a total of 25 (assuming that the individual supply curves are the same, which need not be the case). In summary:<\/p>\n<ul>\n<li>When more<strong>\u00a0<\/strong><strong>firms enter<\/strong>\u00a0the market,\u00a0<strong>supply will increase<\/strong><\/li>\n<li>When\u00a0<strong>firms leave<\/strong>\u00a0the market,\u00a0<strong>supply will decrease<\/strong><\/li>\n<\/ul>\n<h2>Summary<\/h2>\n<p><span style=\"font-family: Georgia;color: #333333\">The four supply shocks have been summarized in the table below. Once again, the best way to learn these shifts is not to memorize them, but to practice shifts on the diagram to view their effects.<\/span><\/p>\n<figure id=\"attachment_660\" aria-describedby=\"caption-attachment-660\" style=\"width: 864px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2016-10-30-at-4.44.46-PM.png\" width=\"864\" height=\"242\" class=\"wp-image-660\" alt=\"image\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2016-10-30-at-4.44.46-PM.png 596w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2016-10-30-at-4.44.46-PM-300x84.png 300w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2016-10-30-at-4.44.46-PM-65x18.png 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2016-10-30-at-4.44.46-PM-225x63.png 225w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2016-10-30-at-4.44.46-PM-350x98.png 350w\" sizes=\"auto, (max-width: 864px) 100vw, 864px\" \/><figcaption id=\"caption-attachment-660\" class=\"wp-caption-text\">Figure 3.5c<\/figcaption><\/figure>\n<div class=\"textbox\">\n<h2>Glossary<\/h2>\n<dl id=\"fs-idp41787328\" class=\"definition\">\n<dt><strong>Aggregate Supply<\/strong><\/dt>\n<dd id=\"fs-idp35020496\"><em>total of all goods and services (including exports and imports) supplied at every price level, within a national economy during a given period. Also called total output<\/em><\/dd>\n<\/dl>\n<dl id=\"fs-idm51600048\" class=\"definition\">\n<dt><strong>Explicit Costs<\/strong><\/dt>\n<dd id=\"fs-idp17805888\"><em>direct costs of production such as rent, salaries, wages, or other input costs. Easily recognizable for classification and recording<\/em><\/dd>\n<\/dl>\n<dl id=\"fs-idm51600048\" class=\"definition\">\n<dt><strong>Factors of Production<\/strong><\/dt>\n<dd id=\"fs-idp17805888\"><em>the combination of labor, materials, and machinery that is used to produce goods and services; also called inputs<\/em><\/dd>\n<\/dl>\n<dl id=\"fs-idm51600048\" class=\"definition\">\n<dt><strong>Implicit Costs<\/strong><\/dt>\n<dd id=\"fs-idp17805888\"><em>the opportunity costs of an action, associated with an actions trade-offs<\/em><\/dd>\n<\/dl>\n<dl id=\"fs-idm51600048\" class=\"definition\">\n<dt><strong>Shift in Supply<\/strong><\/dt>\n<dd id=\"fs-idp17805888\"><em>when a change in some economic factor (other than price) causes a different quantity to be supplied at every price<\/em><\/dd>\n<\/dl>\n<\/div>\n<div class=\"bcc-box bcc-info\">\n<h3 itemprop=\"educationalUse\">Exercises 3.5<\/h3>\n<p><strong>1.<\/strong> Which of the following will NOT shift the market supply curve of good X?<\/p>\n<p>a) A change in the cost of inputs used to produce good X.<br \/>\nb) A change in the technology used to produce X.<br \/>\nc) A change number of sellers of good X.<br \/>\nd) A change in the price of good X.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>2.<\/strong> Which of the following is NOT a determinant of the supply of good X?<\/p>\n<p>a) The cost of inputs used to produce good X.<br \/>\nb) The technology used to produce X.<br \/>\nc) The number of sellers of good X.<br \/>\nd) All of the above are determinants of the supply of good X.<\/p>\n<p>&nbsp;<\/p>\n<p>The following TWO questions refer to the diagram below.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2017-01-14-at-6.05.33-PM.png\" alt=\"screen-shot-2017-01-14-at-6-05-33-pm\" width=\"285\" height=\"247\" class=\"alignnone size-full wp-image-1016\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2017-01-14-at-6.05.33-PM.png 285w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2017-01-14-at-6.05.33-PM-65x56.png 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/10\/Screen-Shot-2017-01-14-at-6.05.33-PM-225x195.png 225w\" sizes=\"auto, (max-width: 285px) 100vw, 285px\" \/><\/p>\n<p><strong>3.<\/strong> At what price will quantity supplied equal 3 units?<\/p>\n<p>a) $1.<br \/>\nb) $2.<br \/>\nc) $3.<br \/>\nd) $4.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>4.<\/strong> At what price will producer surplus equal $2?<\/p>\n<p>a) $1.<br \/>\nb) $2.<br \/>\nc) $3.<br \/>\nd) $4.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>5.<\/strong> A decrease in supply is, graphically, represented by:<\/p>\n<p>a) A leftward shift in the supply curve.<br \/>\nb) A rightward shift in the supply curve.<br \/>\nc) A movement up and to the right along a supply curve.<br \/>\nd) A movement down and to the left along a supply curve.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>6.<\/strong> Which of the following is NOT a determinant of the supply of good X?<\/p>\n<p>a) The cost of labor used to produce good X.<br \/>\nb) The price of good X.<br \/>\nc) The income of consumers who buy good X.<br \/>\nd) The number of sellers of good X.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>7.<\/strong> Which of the following is NOT a determinant of the supply of good X?<\/p>\n<p>a) The cost of labor used to produce good X.<br \/>\nb) Consumer preferences.<br \/>\nc) Technology.<br \/>\nd) All of the above are determinants of the supply of good X.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>8.<\/strong> Martin is selling his viola. The minimum amount he needs to be paid for the viola is $15,500. He find a buyer for who is willing to pay $22,400, but this buyer insists that Martin pays for delivery of the viola. The cost of delivery is $700. Martin\u2019s producer surplus from selling his viola is equal to _____.<\/p>\n<p>a) $14,800.<br \/>\nb) $7,600.<br \/>\nc) $6,900.<br \/>\nd) $6,200.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>9.<\/strong> Which of the following statements about inferior goods is\/are FALSE?<\/p>\n<p>I. Inferior goods are those that we will never buy, no matter how cheap they are.<br \/>\nII. Inferior goods are those that we buy more of, if we become poorer.<br \/>\nIII. Inferior goods are those that we buy more of, if we become richer.<\/p>\n<p>a) I only<br \/>\nb) III only.<br \/>\nc) I and III only.<br \/>\nd) I, II, and III.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"author":58,"menu_order":6,"comment_status":"closed","ping_status":"closed","template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-533","chapter","type-chapter","status-publish","hentry"],"part":69,"_links":{"self":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/533","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/users\/58"}],"replies":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/comments?post=533"}],"version-history":[{"count":17,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/533\/revisions"}],"predecessor-version":[{"id":2186,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/533\/revisions\/2186"}],"part":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/parts\/69"}],"metadata":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/533\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/media?parent=533"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapter-type?post=533"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/contributor?post=533"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/license?post=533"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}