Tilting Supply Curves and Playing Fields

 “We go out and we buy a lot of products made in China. That’s how we celebrate Labor Day.”   David Letterman, 2010

Last time at Econ 101, the Supply Curve was developed and described:  firms will Supply a certain Quantity (Q_s) at a given Price.  As you’d expect, they are Willing to Supply more (Q_s increases) as Price increases.  Think of yourself as the firm and consider how Willing to Sell you are when hearing aid prices are $500 versus $3000.  That’s the hi HealthInnovation crisis in a nutshell:  those guys are Willing to Sell at a lower Price than you are, so bingo, we get two points on our Supply Curve.  At Point #1, (Price = $500),  Q_s  is whatever hi HealthInnovation is willing to sell, because you’re not in the game at that Price. But at Point #2, (Price = $3000) Q_s hgoes up because you and other competitors are now Supplying product, in addition to hi HealthInnovation.  This is what we call “sliding up and down the Supply Curve.”{{1}}[[1]]Before you righteously (and correctly) object, please know that I am aware of the service versus product issue packed in that nutshell, but that is for a different post.  We’ll just stick with Supply for now.[[1]]

 

Just as external sources shift Market Demand Curves, there are external forces that affect Supply Curves, which is different from sliding up and down a single curve.  The key thought here is that while

the Supply Curve shows a positive relationship between a set of potential Q_s offered at different Ps, a change in a Factor other than Price causes a supply shift.  In other words, there are lots of Supply Curves for a set of Prices.  The curves are all positive, but they land in different places along the Quantity axis, as shown in Figure 1.  When the Supply Curve moves left or right, it means there has been an actual change in Supply (as opposed to a change in Price).  Rightward shifts of the curve mean that Supply is increasing.  That is, firms’ willingness to sell at a given Price increases.  Leftward shifts mean firms are less willing to sell at a given Price.   Table 1 details different sources that shift Supply Curves.  Note that NONE of the sources are controlled by Suppliers.  Some help Suppliers, some hurt.  

 

For example, assume a technological advance in office management software that increases office productivity–perhaps even replacing an employee. Firms that adopt the technology lower their marginal costs, which increases their respective Q_s, thereby making them more competitive in the marketplace.  The more competitive the firm, the more likely it is to weather negative forces, including weather, and increasing costs in other areas.  In bad times, those firms are the ones that will remain in the marketplace.

 

Another example takes off on the Letterman joke at the beginning of this post.  If China experiences torrential floods or other natural disastors, the steady stream of hearing aid components coming out of China is likely to be halted for a while.  In other words, an “input” is affected, which temporarily increases the cost of production for hearing aid manufacturers.  As a consequence, Supply shifts leftward.  Likewise, if Chinese farmers can’t make a go of it and swarm into urban areas looking for employment, cost of labor goes down, which translates to more production for the same cost to the component makers.  With the decrease on cost of that “input,” Supply shifts rightward, meaning that hearing aid manufacturers are Willing to Sell at lower Price.  At least that’s how it works in a competitive market.{{2}}[[2]]Yes, I know this is a naive assumption, but models have to start simple and then build in more variables.  I promise, we will add the economic concept of Monopolistic Pricing in a later post.[[2]]

 

Of course, the idea of a purely competitive market in which Price is the only variable allowed to shift is just a theoretical construct.{{3}}[[3]]Economists always qualify these discussion with the phrase “ceterus paribus” — Latin for “all other things held constant.”[[3]] Lots of things are going on at once, including constant shifting of the sources in Table 1.  All of which means that there is no real Price, but the relationship between P and Q_s in the marketplace can be examined with regard to the firms that comprise the market and the external forces that affect the firms… and therefore the market.

 

Table 1.  Shifting the Market Supply Curve: Willingness to Sell at a Given Price

Non-Price Determinants of Supply	Effect	Supply Curves Shifts
Technology	Technological improvements lower production costs, increasing willingness to sell at a lower Price	Right — more willing to sell
Weather	Cataclysmic weather can prevent manufacturing, limit availability of components or labor	Left — less willing to sell
Price of Inputs	Increased cost of labor, components, capital: production costs increase Decreased cost of labor, components, capital: production costs decrease	Left — less willing to sell Right — more willing to sell
# of Firms	more competitors, more sales, more supply fewer competitors, fewer sales, less supply	Right — more willing to sell Left — less willing to sell
Expectation of Future Prices	If firms expect Price will rise, they will wait If firms expect Price to decrease, they will sell more now	Left — less willing to sell Right — more willing to sell
Government Taxes, Subsidies Regulation	If business taxes increase, costs increase If firm(s) receives government subsidy (e.g., VA), costs decrease If FDA reduces regulation (e.g., PSAP position), lower costs, more competitors	Left — less willing to sell Right — more willing to sell Right — more willing to sell

 

So, to recap and answer RR’s Question at last (he probably wishes he’d never asked!):    

 

 Stay tuned for another post or two explaining why the playing field gets more competitive but more tilted every year — at least for the little guys.