Supply Curves (Cambridge (CIE) A Level Economics): Revision Note

An introduction to supply

• Supply is the amount of a good or 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 upward sloping, 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 or 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

Individual and market supply curves 

Diagram analysis

• In New York City, the market supply for smartphones 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 smartphones in New York City during December is 620 units

Movements along the supply curve

• 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 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

Determinants of supply

• There are several factors that will change the supply of a good or service, irrespective of the price level

• Collectively, these factors are called the determinants 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 analysis

• 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

Illustrating changes to the determinants of supply

1. Changes to the costs of production

• If the price of raw materials or other costs of production change, firms respond by changing supply.

• If costs of production increase

  • Supply decreases and shifts left (S→S₁)

  • For example, rising aluminium prices increase bicycle production costs in Malaysia, causing supply to fall

• If costs of production decrease

  • Supply increases and shifts right (S→S₂)

2. Changes to indirect taxes

• Any change to indirect taxes changes the cost of production for a firm and impacts supply

• If indirect taxes increase

  • Supply decreases and shifts left (S→S₁)

  • For example, a higher sugar tax in Thailand raises costs for soft drink producers, reducing supply

• If indirect taxes decrease

  • Supply increases and shifts right (S→S₂)

3. Changes to subsidies

• Changes to producer subsidies directly impact the cost of production for the firm

• If subsidies increase

  • Supply increases and shifts right (S→S₂)

• If subsidies decrease

  • Supply decreases and shifts left (S→S₁)

  • For example, the removal of farming subsidies in Argentina reduces agricultural output

4. Changes to the state of technology

• New technology increases productivity and lowers costs of production

• Ageing technology can have the opposite effect

• If technology improves

  • Supply increases and shifts right (S→S₂)

  • For example, new irrigation systems in Morocco help farmers produce more crops with less water

• If technology worsens

  • Supply decreases and shifts left (S→S₁)

5. Change in the number of firms in the industry

• The entry and exit of firms into the market has a direct impact on the supply

• If ten new firms start selling building materials in Hanoi, the supply of building material will increase

• If the number of firms increases

  • Supply increases and shifts right (S→S₂)

• If the number of firms decreases

  • Supply decreases and shifts left (S→S₁)

  • For example, several electronics factories close in South Africa due to constant power outages, reducing supply

6. 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

• If the weather is good

  • Supply increases and shifts right (S→S₂)

  • For example, ideal monsoon rains boost rice production in India

• If the weather is bad

  • Supply decreases and shifts left (S→S₁)

  • For example, severe drought in Kenya reduces the coffee harvest, lowering supply

7. Future price expectations

• If suppliers predict that prices of a good or service will rise in the future, they will be incentivised to supply more of that good or service

• If suppliers predict that prices of a good or service will fall in the future, they will be incentivised to supply less of that good or service

• If prices are expected to rise

  • Supply increases and shifts right (S→S₂)

  • For example, oil producers in the UAE ramp up output anticipating higher global prices

• If prices are expected to rise

  • Supply decreases and shifts left (S→S₁)