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Demand Demand-Supply-SupplyShift.gif pg-4
Supply Shifts out when Production Costs Fall

We learned earlier that the supply curve is upward sloping due to rising opportunity costs. Higher prices are required to meet the added costs of increasing output. When there is a change in the underlying cost of production, the supply curve shifts, representing an entirely new supply relationship.

Consider a small business that sells grilled tempeh sandwiches. Suppose the cost of tempeh used in each sandwich falls from US$1.25 to 25 cents ($0.25), lowering the cost of making a tempeh sandwich by a full dollar. If all other costs remained the same, the business can now sell its sandwiches for $1 less without reducing profit. This would mean that their supply curve has shifted from S1 out to S2. The vertical distance between the two curves is equal to this $1 reduction in production costs. We can see this because supply curve S1 intersects the vertical axis at $1.30, S2 intersects at 30 cents. When tempeh sandwiches can be sold for $1.50, only 5 per day are supplied on S1 before the drop in costs, but 24 per day are supplied on S2 after tempeh becomes so much cheaper. When sandwiches sell for $2.00 the supply increases from 20 on S1 to 34 on S2.

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