Supply Curves (AQA A Level Economics)

• Supply is the amount of a good/service that a producer is willing and able to supply at a given price in a given time period
• A supply curve is a graphical representation of the price and quantity supplied by producers
  • If the data were plotted, it would be an actual curve. Economists, however, use straight lines so as to make analysis easier
• The supply curve is sloping upward as there is a positive relationship between the price and quantity supplied (QS)
  • Rational profit maximising producers would want to supply more as prices increase in order to maximise their profits
• The law of supply states that there is a positive (direct) relationship between quantity supplied and price, ceteris paribus
  • When the price rises, the QS rises
  • When the price falls, the QS falls

Individual and Market Supply

• Market supply is the combination of all the individual supply for a good/service
  • It is calculated by adding up the individual supply at each price level
      

The Monthly Market Supply of Bread from 4 Bakeries in a Small town

Bakery 1	Bakery 2	Bakery 3	Bakery 4	Market Supply
300	600	180	320	1400 loaves

  

Diagram: Individual & Market Supply Curves

 

Market supply for smart phones in December is predominantly a combination of iPhone and Samsung supply

Diagram analysis

• In New York City, the market supply for smart phones in December is predominantly a combination of iPhone and Samsung supply
• At a price of $1000, the supply of iPhones is 300 units and the supply of Samsung phones is 320 units
• At a price of $1,000, the market supply of smart phones in New York City during December is 620 units

• If price is the only factor that changes (ceteris paribus), there will be a change in the quantity supplied (QS)
  • This change is shown by a movement along the supply curve

Diagram: Movement Along a Supply Curve 

  

There is an extension in quantity supplied (QS) as prices increase and a contraction in quantity supplied (QS) as prices decrease

Diagram analysis

• An increase in price from £7 to £9 leads to a movement up the supply curve from point A to B
  • Due to the increase in price, the quantity supplied has increased from 10 to 14 units
  • This movement is called an extension in QS
    
• A decrease in price from £7 to £4 leads to a movement down the supply curve from point A to C
  • Due to the decrease in price, the quantity supplied has decreased from 10 to 7 units
  • This movement is called a contraction in QS

• There are several factors that will change the supply of a good/service, irrespective of the price level. Collectively, these factors are called the conditions of supply and include:
  • Changes to the costs of production
  • Changes to indirect taxes and subsidies
  • Changes to technology
  • Changes to the number of firms
  • Weather events
  • Future price expectations
  • Goods in joint and competitive supply
• Changes to any of the conditions of supply shift the entire supply curve (as opposed to a movement along the supply curve)

Diagram: Shift of the Supply Curve

A graph that shows how changes to any of the conditions of supply shift the entire supply curve left or right, irrespective of the price level

• E.g. If a firm's cost of production increases due to the increase in price of a key resource, then there will be a decrease in supply as the firm can now only afford to produce fewer products
  • This is a shift in supply from S to S₁. The price remains unchanged at £7 but the supply has decreased from 10 to 2 units
    
    

An Explanation of how each of the Conditions of Supply Shifts the Entire Supply
Curve at Every Price Level

Condition of Supply	Explanation	Factor	Shift	Factor	Shift
Changes to costs of production (COP)	If the price of raw materials or other costs of production change, firms respond by changing supply	COP Increases	S decreases, shifting left (S→S1)	COP Decreases	S increases, shifting right (S→S2)
Indirect taxes	Any changes to indirect taxes change the costs of production for a firm and impact supply	Taxes Increase	S decreases, shifting left (S→S1)	Taxes Decrease	S increases, shifting right (S→S2)
Subsidies	Changes to producer subsidies directly impact the costs of production for the firm	Subsidy Increases	S increases, shifting right (S→S2)	Subsidy Decreases	S decreases, shifting left (S→S1)
New technology	New technology increases productivity and lowers production costs Ageing technology can have the opposite effect	Technology Increases	S increases, shifting right (S→S2)	Technology Decreases	S decreases, shifting left (S→S1))
Change in the number of firms in the industry	The entry and exit of firms into the market have a direct impact on the supply E.g. If ten new firms start selling building materials in Hanoi, the supply of building material will increase	No. of Firms Increases	S increases, shifting right (S→S2)	No. of Firms Decreases	S decreases, shifting left (S→S1)
Weather events	Droughts or flooding can cause a supply shock in agricultural markets A drought will cause supply to decrease. Unexpectedly good growing conditions can cause supply to increase	Drought	S decreases, shifting left (S→S1)	Good Weather	S increases, shifting right (S→S2)
Future price expectations	If firms expects the price of a good/service to increase in the future, they will start supplying more If firms expects the price of a good/service to decrease in the future, they will start supplying less	Expectations price will rise	S Increases Shifts Right (S→S2)	Expectations price will fall	S Decreases Shifts Left (S→S1)
Goods in joint supply	When there is an increase of supply of one good in joint supply (e.g. beef), possibly due to higher prices, there will be an increase in supply of the other good too (e.g. leather)	Supply of one good rises	S good A Increases Shifts Right (S→S2)	Supply of the other good rises	S good B Increases Shifts Right (S→S2)
Goods in competitive supply	Farmers can produce many goods which are competitive in supply E.g. A farmer can grow wheat or potatoes. When they increase the supply of potatoes, the supply of wheat decreases	Supply of one good rises	S good A Increases Shifts Right (S→S2)	Supply of the other good falls	S Decreases Shifts Left (S→S1)