Supply Determinants

• Resource Prices: An increase in resource prices.
• Production Technology: A decrease in production technology.
• Other Prices: An increase in the price of a substitute-in-production or a decrease in the price of a complement-in-production.
• Sellers' Expectations: Expectations by sellers of an increase in the price in the future.
• Number of Sellers: A decrease in the number of sellers in the market.

Old to New

Comparative Statics

Suppose, for example, that a global chocolate cartel flexes its market control and raises the price of chocolate, which causes the price of hot fudge to skyrocket. As a key resource used in the preparation of Hot Momma Fudge Bananarama Ice Cream Sundaes, which works through the resource prices supply determinant, this is just the sort of thing that is bound to decrease the supply of Hot Momma Fudge Bananarama Ice Cream Sundaes. And when supply decreases, the original market equilibrium is disrupted.

How is the Hot Momma Fudge Bananarama Ice Cream Sundae market affected? An increase in hot fudge prices triggers the resource prices supply determinant and causes the supply curve to shift leftward. Click the [Supply Decrease] button to illustrate the leftward shift of the supply curve. The OLD market equilibrium is no longer equilibrium. A NEW market equilibrium is found at the intersection of the original demand curve and the new supply curve. Click the [New Equilibrium] button to highlight this result. The new equilibrium price is Pe and the new equilibrium quantity is Qe. Note that the price is higher and the quantity exchanged is less.

Step by Step

Six Steps

• First, a determinant changes. In this case, the price of hot fudge, a key resource in the preparation of Hot Momma Fudge Bananarama Ice Cream Sundaes, increases. A determinant change ALWAYS starts the market adjustment process.


• Second, the determinant change causes a curve to shift. The higher hot fudge price decreases the supply of Hot Momma Fudge Bananarama Ice Cream Sundae and causes a leftward shift of the Hot Momma Fudge Bananarama Ice Cream Sundae supply curve. Click the [Supply Decrease] button to illustrate this shift.


• Third, the shifted curve disrupts the market equilibrium, causing either a shortage or a surplus. In this example, the decrease in supply creates a shortage. While sellers are now willing and able to sell fewer Hot Momma Fudge Bananarama Ice Cream Sundaes, buyers want to buy the original quantity at the original price. Up to this point, they have no reason to change. Click the [Shortage] button to highlight this imbalance.


• Fourth, the market imbalance causes the price to change. In this case, the buyers are not able to buy all of the Hot Momma Fudge Bananarama Ice Cream Sundaes that they would like, which is the original quantity. As such, they are willing and able to pay a higher price for Hot Momma Fudge Bananarama Ice Cream Sundaes. Click the [Price Increase] button to illustrate this result.


• Fifth, the change in price causes changes in both quantities demanded and supplied. In this Hot Momma Fudge Bananarama Ice Cream Sundae market, the higher price has the intended effect of increasing the quantity supplied--which is the law of supply. It also has the unintended effect of decreasing the quantity demanded--which is the law of demand. Note that while the change in the resource prices supply determinant induces sellers to supply fewer at all prices, including the original equilibrium price, the price increase subsequently causes the quantity supplied to increase.


• Sixth, changes in the quantities demanded and supplied both act to eliminate the market disequilibrium. In this example, the decrease in the quantity demanded and the increase in the quantity supplied eliminate the shortage. The price continues to change as long as the market is out of balance with a shortage. The new equilibrium price at Pe is higher and the new equilibrium quantity at Qe is smaller. Click the [New Equilibrium] button to highlight this result.

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