ACCOUNTING PROFIT: The difference between a business's revenue and it's accounting expenses. This is the profit that's listed on a company's balance sheet, appears periodically in the financial sector of the newspaper, and is reported to the Internal Revenue Service for tax purposes. It frequently has little relationship to a company's economic profit because of the difference between accounting expense and the opportunity cost of production. Some accounting expense is not an opportunity cost and some opportunity cost is does not show up as an accounting expenses.
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Five ceteris paribus factors that affect supply, but which are assumed constant when a supply curve is constructed. They are resource prices, production technology, other prices, sellers' expectations, and number of sellers. Changes in the supply determinants cause shifts of the supply curve and disruptions of the market. Supply determinants are five ceteris paribus factors that are held constant when a supply curve is constructed. They are held constant to isolate the law of supply relation between supply price and quantity supplied. When the determinants change they cause a change in the location of the supply curve. In effect, supply determinants can be said to "determine" the position of the supply curve.
What They AreThe five ceteris paribus supply determinants are resource prices, production technology, other prices, sellers' expectations, and number of sellers.
- Resource Prices: The prices paid for the use of labor, capital, land, and entrepreneurship affect production cost and the ability to supply a good. If resource prices increase, then production cost is higher and the sellers are inclined to offer less of the good for sale. If resource prices decrease, then production cost is lower and the sellers are inclined to offer more of the good for sale.
- Production Technology: The information available concerning production techniques affects the ability to supply a good. Technology is what producers know about the ways to combine inputs into the production of outputs. An advance in technology makes it possible to sell more of a good. A decline in technology means producers can sell less of a good.
- Other Prices: The supply for one good is based on the prices paid for other goods that use the same resources for production. A change in the price of a substitute good (or substitute-in-production) induces sellers to alter the mix of goods purchased. An increase in the price of a substitute motivates sellers to sell more of this good and less of the substitute good. A change in the price of a complement good (or complement-in-production) induces sellers to supply more or less of both goods. An increase in the price of a complement motivates sellers to sell more of this good as they sell more of the complement good.
- Sellers' Expectations: The decision to sell a good today depends on expectations of future prices. Sellers seek to sell the good at the highest possible price. If sellers expect the price to decline in the future, they are inclined to sell more now. If they expect the price to rise in the future, they are inclined to sell less now.
- Number of Sellers: The number of sellers willing and able to sell a good affects the overall supply. With more sellers, there is more supply. With fewer sellers, there is less supply.
How They WorkThese five supply determinants cause the supply curve to shift. This can be illustrated using the positively-sloped supply curve for Wacky Willy Stuffed Amigos presented in this exhibit. This supply curve captures the specific one-to-one, law of supply relation between supply price and quantity supplied. The supply determinants are assumed to remain constant with the construction of this supply curve.
The supply determinants are assumed constant for two reasons:
Reason number two provides a powerful analytical tool. By turning supply determinants off and on, allowing each to change one at a time, a more thorough understanding of the supply side of the market can be had.
- One: To isolate the law of supply relation between supply price and quantity supplied
- Two: To systematically analyze what happens to supply when each determinant changes.
Now, consider how changes in the supply determinants shift the supply curve. A change in any of the five determinants can cause either an increase in supply or a decrease in supply.
- Increase in Supply: An increase in supply is a rightward shift of the supply curve. An increase in supply means that for any price, for every price, sellers are willing and able to sell more of the good. Click the [Increase] button to demonstrate.
- Decrease in Supply: A decrease in supply is a leftward shift of the supply curve. A decrease in supply means that for any price, for every price, sellers are willing and able to sell less of the good. Click the [Decrease] button to demonstrate.
Two ChangesShifts of the supply curve caused by changes in the supply determinants suggest two related notions--a change in supply and a change in quantity supplied.
- A Change in Supply: This a change in the overall supply relation, a change in all price-quantity pairs. It is caused by a change in one of the five supply determinants and is indicated by a shift of the supply curve.
- A Change in Quantity Supplied: This is a change in the specific amount of the good that sellers are willing and able to purchase. It is caused by a change in the supply price and is indicated by a movement along the supply curve from one point to another.
SUPPLY DETERMINANTS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 27, 2024].
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