Chapter 8 – Supply

The concept of supply

Supply refers to the quantity of a good or service that producers are willing and able to sell at various prices over a period of time. The law of supply states that, ceteris paribus, there is a direct relationship between price and quantity supplied: as the price rises, producers are more willing to supply because higher prices make production more profitable; as the price falls, quantity supplied decreases. This relationship is represented by an upward-sloping supply curve.

Determinants of supply

Factors other than price that influence supply include:

Production costs – higher costs such as wages or raw materials decrease supply; lower costs increase supply.
Technology – improved technology increases productivity and shifts the supply curve to the right.
Taxes and subsidies – indirect taxes increase costs and reduce supply, whereas subsidies lower costs and increase supply.
Number of producers – entry of new firms into a market increases supply.
Expectations – expectations of future price rises may induce producers to withhold current supply in anticipation of higher prices.
Opportunity cost – producers reallocate resources toward goods with higher potential profits. If the price of one product falls relative to another, its supply is likely to decrease.
Weather and natural factors – favourable weather conditions increase agricultural output, whereas natural disasters can reduce supply.

Upward-sloping supply curve showing how price increases from P1 to P2 raise quantity supplied from Q1 to Q2 — **Figure 8.1** The supply curve shows a direct relationship between price and quantity supplied.

Movements along the supply curve

Diagram showing extension and contraction along a supply curve as price changes — **Figure 8.2** A rise in price causes an *extension* in supply, while a fall in price causes a *contraction*.

Movements along a supply curve are caused solely by price changes. An increase in price makes supplying the product more profitable, so producers extend supply; a decrease in price results in a contraction of supply because producers supply less when prices fall.

The market supply curve

The market supply curve shows the total quantity supplied by all producers at each price. It is derived by horizontally summing individual supply curves — for example, the quantities offered by different firms in an industry.

Shifts in the supply curve (determinants of supply)

Diagram showing rightward and leftward shifts of the supply curve — **Figure 8.4** A rightward shift of the supply curve represents an increase in supply, while a leftward shift represents a decrease in supply.

A shift of the supply curve occurs when non-price determinants of supply change. An increase in supply shifts the curve to the right (producers supply more at every price), while a decrease shifts it to the left. Key determinants include production costs, technology, taxes and subsidies, opportunity cost, the number of producers, weather conditions and expectations of future prices.

Important distinction

A movement along the supply curve is caused by a price change. A shift of the supply curve is caused by a non-price factor.

Together, these factors explain why supply curves shift even if the price of the product itself remains unchanged.

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