Shift in Supply
We know that a supply curve shows the minimum price a firm will accept to produce a given quantity of output.
What happens to the supply curve when the cost of production goes up? Following is an example of a shift in supply due to a production cost increase.
Step 1. Draw a graph of a supply curve for pizza. Pick a quantity (like Qo). If you draw a vertical line up from Qo to the supply curve, you will see the price the firm chooses. Figure 3.11 provides an example.
Quantity Supplied
Figure 3.11 Supply Curve You can use a supply curve to show the minimum price a firm will accept to produce a given quantity of output.
Step 2. Why did the firm choose that price and not some other? One way to think about this is that the price is composed of two parts.
The first part is the cost of producing pizzas at the margin; in this case, the cost of producing the pizza, including cost ot ingredients (e.g., dough, sauce, cheese, and pepperoni), the cost of
the pizza oven, the shop rent, and the workers’ wages.
The second part is the firm’s desired profit, which is determined, among other factors, by the profit margins in that particular business,
If you add these two parts together, you get the price the firm wishes to charge. The quantity QO and associated price P0 give you one point on the firm’s supply curve, as Figure 3.12 illustrates.