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Demand Demand-Supply-SupplyShift.gif pg-5
Supply Shifts Back when Production Costs Rise

Suppose a small company makes and sells webcams. They don't realize that their webcam relies on a video codec24 that violates the patent of a large software company. The large company sues the small company for patent infringement. The two companies settle out of court, with the small company agreeing to pay a licensing fee to the large company of US$120 per unit. As they have to pay this fee for each webcam sold, this is an increase in production costs, shifting the supply curve back and to the left.

Once the small company must start paying the fee for each webcam, their supply curve shifts from S1 back to S2. Supply curve S2 is shifted up by a vertical distance of $120 from curve S1. Once the firm faces supply curve S2, they supply fewer webcams at every price than they did when their supply curve was S1.

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In case you're wondering, a video codec is computer code that compresses and decompresses video. In the same way, a modem is a modulator/demodulator.

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