difference between revenues and costs. A firm produces goods and services using combinations of labor,

materials, and machinery, or what we call inputs or factors of production. If a firm faces lower costs of

production, while the prices for the good or service the firm produces remain unchanged, a firm’s profits go
60 3 • Demand and Supply

up. When a firm’s profits increase, it is more motivated to produce output, since the more it produces the more

profit it will earn. When costs of production fall, a firm will tend to supply a larger quantity at any given price

for its output. We can show this by the supply curve shifting to the right.

Take, for example, a messenger company that delivers packages around a city. The company may find that

buying gasoline is one of its main costs. If the price of gasoline falls, then the company will find it can deliver

messages more cheaply than before. Since lower costs correspond to higher profits, the messenger company
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