Economics: Factors causing Shift in Supply and Interaction between Demand Supply

FACTORS CAUSING SHIFT IN SUPPLY CURVE

The following are the factors causing the shifts in supply curve.

• Cost of factors of production

Land, labour, capital and organization are the factors of production. Increase in price of factors of production means a decrease in users of production which results in low supply. Similarly, a decrease in price in factors of production, increases the users of production which increases the supply. Such increase and decreases are the causes of a shift in the supply curve.

• Improvement in Technology

Supply of goods changes due to the change in technology. Improvement of technology has made production easy and more reliable. So, the improvement in technology has lead to more prodution and the more supply of goods at the same price. So, supply curve shifts.

• Public Policy

If the government increase the tax rate instead of providing facilities in the production, as a result production gets low. Likewise, if the production decreases, the supply of goods also diminishes with the price remaining constant and supply curve starts moving to the leftward. On the contrary, if the government provides the producers tax discount, it helps to export the native products to the foreign countries and the total supply of goods will be higher, the price of the goods remaining same and the supply curve starts moving to rightward.

• Seasonal Weather

Supply increases with the suitable season but decreases in an adverse unfavorable season. For example, mango cannot be produced every month. During a season of mango,the quantity supply increases without a change in price. In this condition, supply curve shifts upward. Supply of agriculture products reduces due to excessive rainfall and flood. In this situation, supply decreases, remaining price unchanged. So, the curve shifts downward.

• Price of the related goods

If the price of any related goods increases, a producer will switch on the production of those goods. Take the case of ghee and butter, if the demand for butter goes up or their price goes up comparing to the production of ghee, the producer will concentrate on the production of ghee and reduce the production of butter. Supply of butter goes down without any change in price.

• Expectation of Price

If the producer expects the price of a commodity decreases in future, producers may supply more quantity at the same time which leads to increase in supply, then the supply curve shifts upward. Likewise, if producer observes that price of a commodity increase in future, producers may restrict the supply, which may lead to a decrease in supply, then the supply curve shifts downward.

INTERACTION BETWEEN DEMAND AND SUPPLY

According to Alfred Marshall, "As both blades of a scissor are important to cut a piece of cloth, so is demand and supply quantity both are essential for the determination of price".

Demand and supply are two major instruments of the market economy. Demand for goods and services are inversely related with its price whereas supply in positively related with its price, other things remaining same. The interaction between demand and supply means the equality between demand and supply. In free market economy, quantity is determined with the help of interaction between demand and supply. Equilibrium is that situation where demand and supply are a deal.

This table shows the direct relation between price and quantity supplied and an indirect relation between price and quantity demand. In the table, the equilibrium price is Rs.15 and the equilibrium quantity is 60kg, where the demand and quantity supplied is equal. At Rs.5 and Rs 10, there is excess demand over supply because of a low price of the commodity. As the price increases to Rs.20 and Rs.25, there is an excess supply over the demand because of a higher price of the commodity.

From the table, supply is lower and demand is higher at the lower price. Simply, demand is lower and supply is higher at a higher price. The following diagram clears much of the interaction between demand and supply.

In the given figure, the X-axis represents quantity and Y-axis represent the price of a commodity. DD is the demand curve and SS is the supply curve. Both curves crossed each other at equilibrium point E where the demanded quantity is equal o the supplied quantity. Thus, the equilibrium price and output are determined at Rs.15 and 60kg respectively. We can clearly see that demand quantity is 100kg and supply quantity is 20kg at Rs.5 per kg. And when the price goes higher to Rs.10 demand decreases to 80kg and supply increases to 20kg. Serially, when the price increases, the demand quantity decreases and supplies quantity increases.

From the diagram, the demand is more below the equilibrium point E and supply seem more above the equilibrium point E. But both the demand and supply quantity are equal at equilibrium point E.