The reasons for movement along the same supply curve (extension and contraction of supply), are explained under causes of operation of law of supply.
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We give below the reasons for the changes in supply (both increase and decrease in supply):
(1) Changes in Price of Other Commodities:
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A fall in the price of other commodities raises the supply of the commodity in question at each price, as this will increase the profits. Similarly, a rise in the price (on account of higher taxation or otherwise) of other commodities leads to a fall in the supply of the commodity in question.
(2) Changes in Price of Factors of Production:
Increase in the price of factors of production raise the cost of production and so supply is reduced at each price. Similarly, decrease in the prices of factors of production decline the cost of production and thereby raising supply at each price.
(3) Change in Technology:
An improvement in technology decreases the cost of production and producer tends to produce and supply more at each price. Conversely, loss in technical knowledge leads to fall in supply at each price.
(4) Change or Expectations of Change in Price of Commodities:
Supply of a commodity can also change due to expectation of high or low price in future. For instance, expectation of a rise in the prices in future contracts the supply, while expectation of fall in the prices induces the sellers to unload the supply now resulting in an increase in the supply.
(5) Other Factors:
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Improvement in the means of transportation and communication (unless it encourages exports), favourable weather conditions increase in the number of sellers can increase supply, while political disturbances, fear of war unfavorable weather conditions may be responsible for the withholding of supply by the sellers.
The change in the Government policy can also affect the supply, since the Government may restrict production of certain articles on the ground of health and social welfare (e.g., opium in India) or discourage the supply of the commodity by imposing taxes or encourage the supply of the commodity by providing subsidies.
In all the above cases, supply curve shifts to the right or left in case of favourable or unfavorable changes in factors (other than the price of the commodity in question) respectively.