James d. Gwartney

Video:
Is “Price Gouging” Bad?
Now let’s turn to the supply side of a market. Changes in factors that alter the per-unit
cost of supplying a good will cause the entire supply curve to shift. Changes that lower per-unit
costs (for example, an improvement in technology or lower prices for the resources used to
produce the good) will increase supply, causing the entire supply curve to shift to the right. In
contrast, changes that make it more expensive to produce the good such as higher prices for the

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required ingredients or higher taxes imposed on the producers will reduce supply, causing the
supply curve to shift to the left.
Suppose there is a reduction in the prices of cream and milk, ingredients used to
produce ice cream. What impact will these resource price reductions have on the supply and
market price of ice cream? If your answer is that supply will increase and the market price
decline, you are correct. Exhibit 4 illustrates this point within the demand and supply
framework. The lower prices of cream and milk will reduce the per-unit cost of producing ice
cream, causing the supply curve to shift to the right (from S
1
to S
2
). As a result, the
equilibrium price of ice cream will decline from GEL 5 to GEL 3. At the new lower price, the
quantity demanded will increase and once again equal the quantity supplied at 20 thousand
liters per day. Note: The increase in supply (the shift of the entire curve) lowered the price of
ice cream and increased the quantity demanded—a movement along the existing demand
curve. If changes occurred that increased the cost of producing ice cream (for example, higher
prices for the ingredients), the results would be just the opposite: a decrease in supply (shift to
the left), increase in the price of ice cream, and a reduction in the quantity exchanged.

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