1.2.4 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.

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

Supply curve showing extensions and contractions along the curve
Figure 1: Standard upward-sloping supply curve (S1) showing movements along the curve. A movement from point B to A shows a 'Contraction in QS' due to a price rise. A movement from point A to B shows an 'Extension 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 (A → C).

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 showing extensions and contractions along the curve
Figure 1: 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.

Exam Preparation

  1. Distinguish clearly between a movement along the supply curve (caused by price change) and a shift of the curve (caused by a condition of supply).
  2. Draw and interpret supply curve diagrams showing both movements and shifts.
  3. Analyse how each condition of supply causes an increase (shift right) or decrease (shift left).
  4. Link conditions of supply directly to changes in a firm's costs of production.
  5. Understand that taxes and subsidies are government interventions that directly shift the supply curve by altering producers' costs.