3.5 Shifts versus Movements Along Supply Curves

Learning Objective Distinguish between movements along a supply curve and shifts in supply curves.

You’ll find supply curves to be useful tools for analyzing how changing market conditions shape the quantity that businesses supply. The key will be to distinguish between movements along a supply curve and shifts in a supply curve. Here’s a simple rule of thumb:

If the only thing that’s changing is the price, then you’re thinking about a movement along the supply curve. But when other market conditions change, you need to think about shifts in the supply curve.

Movements Along the Supply Curve

The reason that the supply curve doesn’t shift following a price change is because the supply curve already summarizes how much a business will change the quantity it supplies if the price changes. Think back to Shannon’s memo (way back in Figure 1), in which she laid out the quantity she recommends BP supply at each price. A price change won’t lead her to revise her memo—after all, the point of that memo was to lay out a plan for how BP should respond to different prices. And because BP’s individual supply curve simply plots the plans outlined in Shannon’s memo, if these plans don’t shift, neither will its individual supply curve.

And if individual supply curves don’t shift following a price change, then neither will the market supply curve. The point is that a market supply curve summarizes the plans of how all potential suppliers respond to different prices, and so if none of their individual plans shift, then the market supply curve won’t shift.

Indeed, managers find the supply curve to be useful precisely because they can use it to assess the consequences of a price change. For instance, Panel A in Figure 7 shows that when the price of gas is $2, the total quantity supplied by the market is 1.5 billion gallons per week. And it also shows that when the price of gas is $4, the quantity supplied rises to 2.5 billion gallons per week. As you can see, this price change leads to a movement along the supply curve. And this analysis shows that a higher price leads to a rise in the quantity supplied.

Figure 7 | Movement Along a Supply Curve, and Shifts in the Supply Curve

The graph plots Quantity of gas (billions of gallons per week) along the horizontal axis against Price (dollar per gallon) along the vertical axis under Panel A: When the Price Changes and Panel B: When Other Factors Change

The graph under Panel A shows an upward sloping market supply curve that extends through (1.5, 2) and (2.5, 4) and the corresponding arrow labels on the vertical and horizontal axes reads, A. ’A’ price rise from 2 dollars to 4 dollars; C. Leading to a rise in the quantity supplied. The shift from the point (1.5, 2) to the point (2.5, 4) along the curve is labeled B. Movement along the supply curve.

The graph under panel B shows three upward sloping supply curves. The line labeled Original supply curve extends through (1, 1), (2, 3), and (3, 5) whereas the line labeled Decreased supply extends through (0, 1) and (1, 3), and (2, 5). The line for Increased supply extends through (2, 0.8) and (3, 3). A decrease in supply shifts the original supply curve to the left, decreasing the quantity at each and every price. An increase in supply shifts the supply curve to the right, increasing the quantity at each and every price.

Shifts in Supply

But when other factors change—factors other than price—then you should revisit your plans about the quantity you’ll supply at each price. For example, a change in the price of BP’s inputs, in its productivity, its other options for production, or its expectations about future prices would lead Shannon to revise BP’s supply plans. These factors will change the quantity that BP supplies at any given price, and as a result, they’ll shift the supply curve. In order for a specific change in market conditions to shift your supply curve, it’ll have to change your supply plans.

Remember that your supply curve is also your marginal cost curve, and so anything that changes your marginal costs will shift your supply curve. As you think about whether your costs have changed, make sure to think about both your out-of-pocket costs and your opportunity costs. If your marginal costs and hence your supply plans shift, then your supply curve will shift, as shown in Panel B of Figure 7. Lower marginal costs make it profitable to sell a larger quantity at any given price, and so will lead to an increase in supply, shifting the supply curve to the right. By contrast, higher marginal costs mean that it’s no longer profitable to produce as large a quantity at any given price, and so will lead to a decrease in supply, shifting the supply curve to the left.

Shifts in supply are all about the interdependence principle: Your best supply decisions depend on many other factors, and when those factors change, so will your supply curve. The easy way to assess which factors cause the supply curve to shift is to remember the five supply shifters described in the last section: Input prices; Productivity and technology; Other opportunities and the price of related outputs; Expectations; and Type and number of sellers. And here’s a hint that’ll help you remember all five of these: Their first letters spell out I, POET. So when it comes to memorizing the five factors that shift the supply curve, just remember you’re a poet and then you’ll know it.