Page 37 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes Producing a good or service involves taking inputs and applying a process to them to

produce an output. The output is the finished good or service, and inputs are raw materials,
labor, utilities, licensing fees, or even other goods. These inputs are also known as factors of
production. If the price of inputs goes up, the cost of producing the commodity increases.
And therefore at each price producers need to sell their good for more money. So an
increase in the price of inputs leads to a decrease in supply. Similarly, a decrease in the
price of inputs leads to an increase in supply.
2. Current state of production technology: Production of a good involves taking inputs,
applying a process to them, and producing an output. Well, production technology is
involved in the process part. Increases in the level of production technology can make that
process more effi cient.

Example: Imagine that you run a basic garments screen printing business out of your
home. Now let’s say you decide to invest in a workshop installed with the latest production
technology. With this use of technology, the operation becomes more efficient and you are able

increase the supply of garments. If you decide to expand even further, some added technological
improvements might be warranted. This further increases your ability to supply garments since
it reduces your labor costs. By automating the process, reliance upon labor is lessened and those
resources are released for utilization elsewhere.
3. Producer’sexpectations: It doesn’t just matter what is currently going on - one’s expectations
can also affect how much of a product one is willing and able to sell.

Example: If your firm produces budget mobile phones and you hear that Nokia will

soon introduce a new phone that has more features than your phone at similar prices, you (and
other producers) may decide to hurry up and sell off your stock before the new Nokia phone is
launched. When people decide to increase production/sales today, they are increasing the current
supply for mobile phones because of what they expect to happen in the future.
4. Number of producers in the market: As more or fewer producers enter the market this has a
direct effect on the amount of a product that producers (in general) are willing and able to
sell. More competition usually means a reduction in supply, while less competition gives
the producer an opportunity to have a bigger market share with a larger supply. If the
number of producers in the same market increases, then the market supply will go up but
the individual supply might come down.

Each of these shift factors will cause a shift in supply, whereas a change in price causes a
movement along the supply curve.
Any change in price will cause a movement along an existing supply curve. The result will be
an extension or contraction of supply, in other words, an increase or decrease in the quantity
supplied. Refer to Figure 3.2, when price increases from P to P , quantity supply increases
1
from Q to Q . Conversely, when supply decreases from P to P, quantity supplied decreases from
1 1
Q to Q.
1

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