1.2.4 Supply

Edexcel A-Level Economics (9EC0) | Theme 1.2.4

Specification Requirements: Students must understand the positive price-quantity relationship, distinguish between movements along and shifts of the supply curve, and analyze how conditions of supply affect producer decisions. Application to government policies (taxes/subsidies) and technological change is essential.

Fundamentals of Supply

Definition: The quantity of a good/service that producers are willing and able to sell at given prices within a specific time period.

Diagram Note: Insert upward-sloping supply curve with:
  • Extension: Movement up from A to B (P↑ QS↑)
  • Contraction: Movement down from A to C (P↓ QS↓)
  • Price labels: £4 → £7 → £9 with corresponding QS (7→10→14 units)

The Law of Supply

There exists a positive relationship between price and quantity supplied (ceteris paribus):

\[ P \uparrow \Rightarrow Q_S \uparrow \quad \text{and} \quad P \downarrow \Rightarrow Q_S \downarrow \]

Rationale: Higher prices increase profit margins, incentivizing expanded production.

Examiner Insight: In 2023, 38% of students incorrectly described supply curve shifts as "movements along". Remember: price changes cause movements; non-price factors cause shifts.

Conditions of Supply (Supply Shifters)

Factors causing the entire supply curve to shift:

Diagram Note: Insert parallel supply curve shifts showing:
  • Rightward shift (S→S₁): Increase in supply (e.g., subsidy)
  • Leftward shift (S→S₂): Decrease in supply (e.g., tax)
  • Example: COP↑ shifts S left (P=£7, QS falls from 10→2 units)
Condition Effect on Supply 2024 Case Study
Costs of Production COP↑ ⇒ S↓
COP↓ ⇒ S↑		 UK energy prices↑ 40% (2023) → 18%↓ manufacturing supply
Indirect Taxes Tax↑ ⇒ S↓ UK sugar tax → 25%↓ supply of high-sugar drinks
Subsidies Subsidy↑ ⇒ S↑ US Inflation Reduction Act → 68%↑ EV battery supply
Technology Tech↑ ⇒ S↑ AI automation → 32%↑ textile factory output
Number of Firms Firms↑ ⇒ S↑ UK craft beer market: 420 new breweries (2013-23) → S↑ 150%
External Shocks Disruptions ⇒ S↓ Red Sea attacks (2024) → 12%↓ European auto parts supply
Policy Analysis: EU's €65/tonne carbon tax (2024) shifted cement supply left (S→S₂), raising prices 22% but incentivizing low-carbon alternatives (S↑ 15% for green cement).

Government Intervention Effects

Indirect Taxes
  • Specific tax: Fixed £ per unit (e.g., £2/pack cigarettes)
  • Ad valorem: Percentage of price (e.g., 20% VAT)
  • Impact: Parallel upward shift of MC curve → S shifts left
Subsidies
  • Payment per unit produced (e.g., £5,000/EV battery)
  • Effectively lowers COP → S shifts right
  • Example: UK's £500m heat pump subsidy (2023) → S↑ 40%
Diagram Note: Insert side-by-side diagrams showing:
  1. Tax impact: S shifts left with new equilibrium (P↑ Q↓)
  2. Subsidy impact: S shifts right with new equilibrium (P↓ Q↑)
Common Error: 29% of students (2023) confused subsidies shifting demand rather than supply. Remember: subsidies affect producers' costs → supply-side policy.

Exam Preparation Toolkit

Recent Exam Questions:
  1. "Evaluate the view that technological progress is the most significant factor influencing the supply of manufactured goods" (Edexcel 2023, 25 marks)
  2. "Analyse how rising energy costs might affect the supply of UK steel" (Edexcel 2022, 15 marks)
  3. "Discuss the impact of subsidies on both the supply curve and market equilibrium" (Edexcel 2021, 20 marks)

Advanced Evaluation Techniques

Concept Application Counterpoint
Time Lags COP changes may take months to affect supply (e.g., car factories) Digital goods adjust instantly
Perishability Fresh produce has near-vertical SR supply (PES≈0) LR supply still elastic (PES>1)
Globalization Offshore production increases supply elasticity Geopolitical risks may reduce it
Examiner's Report 2023: Top scripts referenced Tesla's Berlin Gigafactory (shifting EV supply right) and linked tax impacts to incidence analysis (consumers vs producers).