Civil Engineering Reference
In-Depth Information
UNDERSTANDING CHANGES IN SUPPLY
Just as we were able to distinguish between shifts of, and movements along, the
demand curve, so we can have the same discussion for the supply curve. A change
in the price of a good itself will cause a movement along the supply curve, and be
referred to as an
extension
or
contraction
of supply. A change in any non-price
determinant, however, will shift the curve itself and be referred to as an
increase
or
decrease
in supply.
Let us consider one example in detail. If a new computer-assisted design
and cost estimating package reduces fees relating to new builds, then design and
build contractors will be able to supply more new buildings at all prices because
their costs have fallen. Competition between contractors to design and build will
ultimately shift the supply curve to the right, as shown in
Figure 5.2
. By following
along the horizontal axis, we can see that this rightward movement represents an
increase in the quantity supplied at each and every price. For example, at price P, the
quantity supplied increases from Q to Q
1
. Note that if, on the other hand, the costs
of production rise, the quantity supplied would decrease at each and every price and
the related supply curve would shift to the left.
For analytical purposes, it is helpful to distinguish the cause of changes in
supply. In our example about computer-assisted design, it would have been wrong
to conclude that price has simply fallen and quantity supplied expanded accordingly.
The reason for the increase in supply, at all prices, is due to a change in technology.
Figure 5.2
A shift of the supply curve
If price changes, we move along a given curve. However if the costs of production fall,
the supply curve shifts to the right from S to S
1
representing an increase in the quantity
supplied at each and every price.
S
S
1
P
0
Q
Q
1
Quantity of new builds supplied per period
