2.3. Supply
- Syllabus
- 0455–2027–2028
- Topic
- 2.3
- Level
- —
Learning objectives
2.3.1Individual and market supply• definition of supply• link between individual supply and market supply• drawing and interpretation of the supply diagram2.3.2Movements along a supply curve• causes of extensions and contractions in supply• diagrams that illustrate movements along a supply curve2.3.3Shifts of a supply curve• causes of decreases and increases in supply• diagrams that illustrate shifts of a supply curve
Build individual and market supply
Supply is the willingness and ability of producers to sell a product at a given price over a given period. An individual supply schedule records one producer's planned quantity at each price; market supply combines all producers' plans.
To find market supply, add the quantities supplied by every producer at the same price. Prices remain aligned while quantities are summed horizontally.
| Price ($) | Firm A | Firm B | Market quantity supplied |
|---|---|---|---|
| 2 | 3 | 2 | 5 |
| 6 | 8 | 7 | 15 |
| 10 | 14 | 12 | 26 |
On a supply diagram, price is on the vertical axis and quantity supplied on the horizontal axis. Plot each price–quantity pair and join the points. The curve normally slopes upward: with other conditions unchanged, a higher price makes producing and selling additional units more worthwhile.
Supply means planned sales, not simply the amount already produced or stored. When constructing one supply curve, the product's own price varies while conditions such as input costs, technology, taxes and subsidies are held constant.
Trace extensions and contractions in supply
A change in the product's own price causes a movement along the existing supply curve. Other supply conditions are unchanged, so only the planned quantity supplied changes.
| Own-price change | Movement | Quantity supplied | Diagram direction |
|---|---|---|---|
| price rises | extension in supply | increases | up and right along the same curve |
| price falls | contraction in supply | decreases | down and left along the same curve |
If the price rises from 12to16 and firms plan to sell 120 rather than 80 units, the extra 40 units are an extension in supply. This compares two points on the same curve; it does not draw a new supply curve.
A change in demand may change the market price and therefore move quantity supplied along the supply curve, but demand itself is not a direct determinant of supply. Reserve increase/decrease in supply for shifts caused by non-price supply conditions.
Explain increases and decreases in supply
A non-price determinant changes how much producers plan to sell at every possible price, so the entire supply curve shifts. A rightward shift is an increase in supply; a leftward shift is a decrease in supply.
| Change | Supply shift | Mechanism |
|---|---|---|
| input costs fall or a subsidy rises | right | production becomes more profitable at each price |
| indirect tax or wage/raw-material costs rise | left | higher unit costs reduce profitable output |
| technology or worker productivity improves | right | more output can be produced from available inputs |
| number of producers or productive resources rises | right | market capacity increases |
| adverse weather damages an agricultural harvest | left | less output can be brought to market |
Keep price on the vertical axis and quantity on the horizontal axis. Draw the original curve S1. For an increase, draw S2 to the right; at the same price, more is supplied. For a decrease, draw S2 to the left; at the same price, less is supplied.
Reverse changes usually reverse the direction: higher productivity, discovery of resources, lower costs, favourable weather or a larger subsidy can increase supply; lost resources, higher costs or damaging weather can reduce it.
A direct tax on a firm's profit does not automatically change the marginal cost of producing each unit, whereas an indirect tax on the product raises unit cost and can shift supply left. The product's own price still causes a movement along supply, not a shift.