Effect of change in Input price on the supply curve of the firm.

 

 

Learning Contents:                                                            

·            Impact of rise in input price on supply of the firm.

·            Impact of fall in input price on supply of the firm.

The role of inputs or factors of production is very crucial for the production of the goods or services. 

Inputs such as raw material, machinery, land, and, labor are most commonly used inputs in the production process.  Therefore, production is mainly dependent on the inputs.  A change in input price will not only impact the production cost but affect the supply as well. If production cost rises owing to rise in input cost will further decrease the supply of the firm, whereas, If production cost falls owing to fall in input cost will further increase the supply of the firm. Hence, the impact of change in input price on the supply curve can be understood into two categories as below:

1. Impact of rise in input price on supply of the firm.

A rise in input cost implies an increase in production costs causing supply to fall, while the price remaining constant, profits of the firm will decrease. When profits will go down, it will be less motivated to produce goods and services and thus causing the supply curve to shift backward or inward or towards left. For example, an online grocery company that delivers grocery items around a city. It analyses that fuel cost is one of its major costs and if its price rises, then the company will find deliver groceries more expensive than before. Therefore, the impact of rise in fuel cost will cause lower deliveries or fewer supplies at any given price.

Explanation:

When price is kept constant, the impact of rise in input price on the supply of the firm is shown in Figure 1.1. The quantity supplied is shown on X-axis and the price on Y- axis. S₀ is the initial supply curve and S₁ is the final supply curve. When price is kept constant, any rise in input price leads to decreased production of goods and services causing quantity supplied to decrease from OC₁ to OC₂ and supply curve shifts to the left from S₀ to S₁. This backward shifting of the supply curve is called a decrease in supply.

 

2. Impact of fall in input price on supply of the firm.

A fall in input cost implies decrease in production costs causing supply to rise, while the price remaining constant, profits of the firm will increase. When profits will go up, it will be motivated to produce more goods and services that causing the supply curve to shift forward or outward or towards right. With same example, If an online grocery company analyses that fuel cost is one of its major costs and if its price falls then the company will find deliver groceries more cheaply than before. Therefore, the impact of fall in fuel cost will cause higher deliveries or more supplies at any given price.

 Explanation:

When price is kept constant, the impact of a fall in input price on the supply of the firm is shown in figure 1.2. The quantity supplied is shown on X-axis and the price on Y- axis. S₀ is the initial supply curve and S₁ is the final supply curve. When price is kept constant, a fall in input price leads to an increased production of goods and services causing quantity supplied to increase from OC₁ to OC₂ and therefore, supply curve shift to right from S₀ to S₁. This forward shifting of the supply curve is called an increase in supply.

 

We summarize this by saying that price of inputs and the supply of goods and services are inversely or negatively related to each other. 

 

Choose the correct answer based on the above learning

1. Which of the following will shift the supply curve rightward?

a. A technological degradation.

b. An increase in population.

c. A decrease in the price of inputs needed in the production of goods and services.

d. a decrease in the price of the good.

2. The supply curve shifts________ , when there is a____________.

a. left; rise in input price.

b. right; rise in input price.

c. left; fall in input price.

d. none of above.

3. Online grocery delivery staff negotiates a wage increase; how this change will affect the delivery of groceries?

a. It will decrease the supply.

b. It will increase the supply.

c. It will cause no change.

d. None of the above.

4. If price of input rises, it will

a. shift the supply curve to the right.

b. shift the supply curve to the left.

c. no shifts in supply curve.

d. shift the supply curve both left and right side.

Answer Key:

1.c

2.a

3.a

4.b

 

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