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“This video will explain and discuss the non price determinants of supply. Which are the the factors that affect supply other than price. These are the factors that cause shifts. The supply curve so just to refresh your memory in one of the previous video.
We made reference or we explained the law of supply and we remember that ceteris paribus as the price of a product rises. The quantity supplied of that product will usually increase now again remember understanding the law of supply depends on the understanding. The assumption of ceteris paribus. Now what are those factors that we hold constant.
Because that s what ceteris paribus means it means other factors held constant well these are the non price factors that affect supply these are the non price determinants as was mentioned earlier these are the factors that will shift the whole supply curve. So before we continue let s distinguish between movements along the supply curve and shifts of the supply curve. We know from a previous video that movements along the curve happened when the price of the product changes so changes in price will cause movement along the supply curve and the terminology that we use is there s been a change in quantity supplied. So we say there s either been an increase or a decrease in quantity supplied.
But when the non price factors change they cause a shift of the whole supply curve here. We say there has been an increase or a decrease in supply. Okay an increase in supply. As you can see here an increase in supply.
The supply curve shifts to the right as you can see here from s2 s1. The supply curve has shifted to the right. That s an increase in supply. A decrease in supply is represented by the supply curve shifting to the left.
So as you can see here from s2 s2. That s the supply curve shifting to the left that s a decrease in supply. So what are though is non price factors that cause a shift of the whole supply curve first let s take a look at the costs of the factors of production. Any changes in the costs of the factors of production or the costs of production will cause a shift of the supply curve.
We know that there are four main factors of production land labor capital and enterprise. We know that land earns rent that s the income of land. Which is a cost for the business wages. That s the cost of hiring labor interest that s the reward for capital s contribution to the production process.
Which is the cost to the business for employing capital and profits. That s what the entrepreneur earns anything that causes a rise in any of these costs of production will shift the supply curve to the left so when costs of production rise. When the costs of production rise supply will decrease. It will shift to the left when the costs of production fall supply will increase it will shift to the right.
So. If the workers started to demand higher wages or bank. Loans became more expensive. So interest.
The interest rates. Increased or the rent of the factory. Premise factory building has gone up anything that raises the costs of production will decrease supply anything that lowers the cost of production will increase supply another. Very important non price determinants of supply is changes in technology.
Basically. Technology can either get better. So. There s an advancement in technology.
When there s an advancement in technology supply will increase the supply curve will shift to the right sometimes. Which is quite rare. But this can happen during a war or a natural disaster. There can be a backward step in the state of technology and this would have the opposite effect on supply supply will actually decrease.
So another major non price determinants is changes in the prices of related goods. Now when it comes to supply goods can be related by either being good that are in joint supply or goods that are in competitive supply. Let s have a look at joint supply goods that i enjoin supply are those that are often produced together so they are byproducts of each other like lamb and wool. If the price of lamb was to rise this would encourage producers to produce more lamb and naturally.
This would lead to an increase in the supply of wool. Because they are produced together you can t really produce lamb without producing wool goods in competitive supply is the opposite they are usually goods that are alternative uses of the same factors of production so having the same factors of production you can produce one or the other for example a very good example is land you can use land to supply food to grow food or to produce biofuels. So what would happen if the price of biofuels rose. Well more farmers would want to grow biofuels and this would naturally lead to a decrease in the supply of food.
Because producers would switch from the production of food to the production of biofuels. Another major factor that does affect supply. A non price determinants of supply is the producers expectations basically. If producers are optimistic about the future they expect that prices will rise in the future.
They expect that the demand will be strong they might decide to increase supply or they might decide to keep supply the same and just wait until prices are higher and benefit from that higher price. But the point is the producers expectations of the future affect their production decisions. If producers are pessimistic about the future and they expect demand to fall or they expect prices to fall. They might decide to to adjust their production plan.
So again optimism and pessimism or the producers expectations of the future might affect supply either by increasing it or decreasing. It it is a very power non price determinants of supply government policy through the use of indirect taxes and subsidies. Also has a powerful effect on supply basically. Indirect taxes are designed to discourage production.
They are taxes on production and naturally they decrease supply. So the supply curve will shift to the left because supply decreases subsidies have the opposite effect basically subsidies are the government s way of encouraging production of a certain good because the government is basically giving money to the producer to produce more that lowers. The producers costs of production. Which would naturally increase supply so remember indirect taxes decreased supply.
They shift the supply curve to the left subsidies increased supply. They shift the supply curve to the right the last non price factor or non price determinants of supply that we re going to look at is the number of firms in the market. If the market is very profitable and prices are rising and profits are rising this might encourage more firms to enter the market. So naturally supply will increase the supply curve will shift to the right and the opposite is true if the profits in that market are falling and prices are falling this would encourage some firms to exit to the market.
So more firms would exit the market and you would expect supply to decrease. So the number of firms in the market is also an important non price. ” ..
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