Supply

Specification Coverage: Edexcel unit 1.2.4 - Supply. Students must learn the distinction between movements along the supply curve and shifts of a supply curve; and the factors that may cause a shift in the supply curve. These notes also cover input costs, technology and taxation as causes of a shift in supply.

The Basics of Supply

Supply: The quantity of a good/service producers are willing and able to produce/sell at a given price in a given time period.

The Law of Supply: There is a positive relationship between price and quantity supplied (QS). As price rises, QS rises (ceteris paribus).

Reason: Higher prices increase potential profit margins, giving firms an incentive to increase output.

The Supply Curve

Upward-sloping supply curve showing movements between points A, B and C as the good's own price changes
Figure 1: Standard upward-sloping supply curve (S1) showing movements along the curve. A movement from point A to B shows an 'Extension in QS' due to a price rise. A movement from point B to A shows a 'Contraction in QS' due to a price fall.

It is upward sloping due to the law of supply.

A Movement Along the Curve: Caused only by a change in the price of the good itself (ceteris paribus).

  • Extension in QS: A rise in price leads to a movement up the curve (A → B).
  • Contraction in QS: A fall in price leads to a movement down the curve (B → A).

Conditions of Supply (Shifts of the Curve)

A shift of the entire supply curve is caused by a change in a non-price factor influencing a firm's costs or production capacity.

Supply curve shifting right to lower equilibrium price and raise quantity, and left to do the reverse
Figure 2: Supply curve shifting right from S1 to S2 due to a non-price factor (e.g., technological advance). A shift left from S2 to S1 could be caused by an increase in costs of production.
Condition of Supply Effect on Supply Reason & Example
Changes in Costs of Production (e.g., raw materials, wages, rent) Costs ↑ = Supply ↓ (shift left)
Costs ↓ = Supply ↑ (shift right) 		Higher costs reduce profitability at each price, so less is supplied.
Introduction/Change in Indirect Taxes (e.g., VAT, sugar tax) Tax ↑ = Supply ↓ (shift left)
Tax ↓ = Supply ↑ (shift right) 		Taxes increase a firm's costs, effectively reducing supply.
Introduction/Change in Subsidies (government grants to producers) Subsidy ↑ = Supply ↑ (shift right)
Subsidy ↓ = Supply ↓ (shift left) 		Subsidies lower a firm's costs, increasing profitability and supply.
Technological Advances Tech. ↑ = Supply ↑ (shift right) New technology improves productivity and lowers average costs.
Change in Number of Firms in the Market Firms ↑ = Supply ↑ (shift right)
Firms ↓ = Supply ↓ (shift left) 		More firms in the industry increases total market supply.
External Shocks (e.g., natural disasters, geopolitical events) Positive external shocks = Supply ↑ (shift right)
Negative external shocks = Supply ↓ (shift left) 		Events like natural disasters can disrupt production (negative shock).

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Seven original multiple-choice questions on the law of supply, movements along and shifts of the supply curve, and the conditions of supply.

Practice Questions: 1.2.4 Supply