Supply | IGCSE Class 10 Economics Notes

This note covers the definition of supply, how to draw and read a supply curve, the law of supply, movements along the supply curve described as extensions and contractions, the link between an individual firm's supply and market supply through aggregation, and the conditions of supply that shift the curve, described as an increase or a decrease in supply.

What is supply, and what does a supply curve show?

Supply is the quantity of a good or service that producers are willing and able to offer for sale at a given price, over a given period of time.

Supply is always linked to a price: economists do not talk about "the supply" of a good without stating the price at which that quantity would be offered.

Definition: supply. The quantity of a good that firms are willing and able to sell at a given price in a given time period, other things (such as costs and technology) remaining unchanged.

A supply schedule is a table listing the quantity that firms would offer for sale at a range of different prices, with technology and the prices of inputs held constant.

A supply curve is the same information drawn as a graph, with price on the vertical axis and quantity supplied on the horizontal axis.

Each point on the curve shows the quantity that firms choose to produce and sell at one particular price.

Draw price on the vertical axis and quantity supplied per period on the horizontal axis.

Plot a set of price-quantity pairs from a supply schedule and join them with a line that slopes upwards from left to right, showing that a higher price is associated with a larger quantity supplied.

The usual upward slope reflects the law of supply: as the price of a good rises, and all other influences on supply stay the same, producers are willing to supply a larger quantity, because a higher price covers the extra cost of producing additional units and makes production more profitable.

Definition: law of supply. As the price of a good rises, other things being equal, the quantity supplied of that good usually rises; as price falls, quantity supplied usually falls.

How do we draw and interpret a supply diagram?

A supply diagram plots the price-quantity pairs from a supply schedule. The table below is a worked supply schedule for a single firm selling a good.

Plotting these pairs and joining them gives an upward-sloping line. The intercept on the price axis (here, $2) is the lowest price at which the firm is willing to supply any output at all; below this price the firm supplies zero, because the price does not cover the firm's unavoidable costs of production.

Worked example 1. A bakery's supply schedule shows that it supplies 20 loaves a day when the price is $3 a loaf, and 50 loaves a day when the price rises to $5 a loaf. Show this on a supply curve and state what the curve's slope shows.

Answer: Plot the point ($3, 20 loaves) and the point ($5, 50 loaves) with price on the vertical axis and quantity on the horizontal axis, then join them with an upward-sloping line.

The upward slope shows that, as price rose from $3 to $5, the bakery was willing and able to supply a larger quantity (an extra 30 loaves a day), which is consistent with the law of supply.

What are extensions and contractions in supply?

A change in the price of the good itself, with all other conditions of supply unchanged, causes a movement along the existing supply curve, not a shift of the whole curve.

• An extension in supply is a rise in the quantity supplied caused by a rise in the price of the good, shown as an upward-and-rightward movement along the same supply curve.
• A contraction in supply is a fall in the quantity supplied caused by a fall in the price of the good, shown as a downward-and-leftward movement along the same supply curve.

Definition: extension and contraction in supply. An extension in supply is a rise in quantity supplied caused only by a rise in price; a contraction in supply is a fall in quantity supplied caused only by a fall in price. Both are movements along one fixed supply curve.

These terms matter because they describe a change caused by price alone. If the quantity supplied changes for any other reason, for example because costs of production change, this is not an extension or a contraction; it is a shift of the whole curve, covered below.

How is market supply built up from individual supply?

Each firm in a market has its own supply curve, showing how much that firm alone would supply at each price. The market supply curve shows the total quantity that all firms in the market together would supply at each price.

Definition: market supply. The total quantity of a good that all firms in a market are willing and able to supply at a given price, found by adding together the quantities supplied by each individual firm at that price.

Market supply is obtained by horizontal summation: at each price, the quantities that every individual firm would supply are added together to give the market total.

If a firm would supply zero at a price (because the price is too low to cover that firm's costs), it simply contributes zero to the market total at that price; it does not stop the other firms from supplying.

Notice that at a price of $4, Firm B is not yet willing to produce because the price is below its minimum supply price, so it contributes nothing to the market total at that price.

Once the price rises to $6 and above, both firms supply a positive quantity, and both contribute to market supply.

Draw two separate supply curves, one for Firm A and one for Firm B, on separate diagrams with the same price axis.

On a third diagram, add together the quantity each firm supplies at every price to plot the market supply curve; this third curve lies further to the right than either individual curve, because it is their horizontal sum.

Worked example 2. At a price of $12, Firm A supplies 45 units and Firm B supplies 38 units. There are no other firms in the market. Calculate market supply at this price.

Answer: Market supply = Firm A's supply + Firm B's supply = 45 + 38 = 83 units at a price of $12.

If the number of firms in a market increases, for example because new firms enter an industry, market supply at every price rises, so the whole market supply curve shifts to the right.

If firms leave the market, market supply at every price falls, so the curve shifts to the left.

What are the conditions of supply?

The conditions of supply are all the influences on supply other than the price of the good itself. When price changes, we move along the supply curve (an extension or a contraction); when a condition of supply changes, the whole supply curve shifts to a new position.

Definition: conditions of supply. The non-price influences on how much firms are willing to supply, such as costs of production, technology, taxes and subsidies, and the number of firms in the market; a change in any of these shifts the whole supply curve.

Costs of production and technology

If the cost of a factor of production, such as the wage rate paid to labour or the price of a raw material, rises, the firm's cost of producing each unit rises.

This is usually accompanied by a rise in the firm's marginal cost at every level of output, so the firm now supplies less at any given price; the supply curve shifts to the left.

A fall in input prices has the opposite effect and shifts the curve to the right.

Improvements in technology allow a firm to produce the same output using fewer inputs, or more output from the same inputs.

This is expected to lower the firm's marginal cost at any level of output, so the firm now supplies more at any given price; the supply curve shifts to the right.

Worked example 3. At a price of $10, a firm supplies 60 units before a rise in the wages it pays. After the wage rise, the firm supplies only 45 units at the same price of $10. Describe what has happened to the firm's supply curve.

Answer: Because the quantity supplied at the unchanged price of $10 has fallen from 60 to 45 units, this is not a contraction (price has not changed); it is a leftward shift of the whole supply curve, caused by the rise in a cost of production (wages), which is a condition of supply.

Taxes and subsidies

An indirect tax placed on each unit sold, such as a tax of a fixed amount per unit, raises the firm's cost of supplying each unit by the amount of the tax, so it shifts the supply curve to the left: at any given market price, the firm now supplies fewer units.

A government subsidy paid to producers has the opposite effect: it lowers the firm's cost of supplying each unit, so it shifts the supply curve to the right, and firms are willing to supply more at any given price.

Other conditions of supply

Other conditions of supply include the price of other goods a firm could produce instead (if a more profitable alternative appears, resources may move away, shifting supply of the original good to the left), weather and natural factors (especially important for agricultural supply, where a poor harvest shifts the supply curve to the left), government regulations (such as safety or environmental rules that raise costs and shift supply to the left), and producers' expectations of future prices (if firms expect prices to rise, they may initially hold back supply, shifting current supply to the left).

Worked example 4. A government removes a subsidy of $2 per unit that it had been paying to wheat farmers. Before the subsidy was removed, farmers supplied 500 tonnes of wheat at a price of $150 a tonne.

Explain the likely effect on the supply curve, and on the quantity supplied at $150 a tonne.

Answer: Removing the subsidy raises the farmers' net cost of supplying each tonne by $2, so the whole supply curve shifts to the left.

At the unchanged price of $150 a tonne, farmers are now willing to supply less than the original 500 tonnes, because part of the revenue that previously covered costs (the subsidy) is no longer received.

How do shifts in supply differ from movements along the supply curve?

This distinction is central to the unit. A change in the price of the good itself moves us along a fixed supply curve (extension or contraction). A change in any condition of supply moves the whole curve to a new position (increase or decrease in supply).

Definition: increase and decrease in supply. An increase in supply is a rightward shift of the whole supply curve, so that more is supplied at every price; a decrease in supply is a leftward shift of the whole curve, so that less is supplied at every price.

Both are caused by a change in a condition of supply, not by a change in price.

Draw one original upward-sloping supply curve, S₁.

To show a movement along the curve, mark two points on S₁ at different prices and quantities and join them with an arrow along the curve.

To show an increase in supply, draw a second curve, S₂, parallel to S₁ but further to the right, so that at the same price more is now supplied; label the horizontal shift with an arrow from S₁ to S₂.

A common confusion is to describe any rise in quantity supplied as "an increase in supply".

The correct term depends entirely on the cause: if price rose and caused the rise in quantity, it is an extension in supply; only if a condition of supply (such as lower costs, better technology or a subsidy) caused the rise, with price unchanged or even falling, is it correctly called an increase in supply.

Going beyond the syllabus

Once the supply curve is understood, it becomes possible to measure how strongly quantity supplied responds to a change in price.

This responsiveness is called price elasticity of supply, and it is useful background for understanding why some supply curves are steeper than others, although it is not part of this unit's own list of points.

Es = %ΔQs ÷ %ΔP gives the price elasticity of supply, the percentage change in quantity supplied divided by the percentage change in price that caused it.

A vertical supply curve has an elasticity of zero (supply is completely unresponsive to price); a supply curve passing through the origin has an elasticity of exactly one at every point on it.

Glossary

• Supply — the quantity of a good that firms are willing and able to sell at a given price in a given period.
• Law of supply — the principle that quantity supplied usually rises as price rises, other things being equal.
• Supply schedule — a table showing the quantity supplied at a range of different prices.
• Supply curve — a graph, with price on the vertical axis and quantity on the horizontal axis, showing the quantities supplied at different prices.
• Individual supply — the quantity that one single firm is willing and able to supply at each price.
• Market supply — the total quantity that all firms in a market together supply at each price.
• Horizontal summation — adding together the quantities supplied by each firm at the same price to find market supply.
• Extension in supply — a rise in quantity supplied caused by a rise in price, shown as a movement up the supply curve.
• Contraction in supply — a fall in quantity supplied caused by a fall in price, shown as a movement down the supply curve.
• Conditions of supply — non-price influences on supply, such as costs, technology, taxes, subsidies and the number of firms.
• Increase in supply — a rightward shift of the whole supply curve, caused by a change in a condition of supply.
• Decrease in supply — a leftward shift of the whole supply curve, caused by a change in a condition of supply.
• Factor of production — a resource, such as labour, capital or raw materials, used to produce a good.
• Indirect tax — a tax placed on a good or service, such as a fixed amount charged per unit sold.
• Subsidy — a payment made by the government to a producer, usually to lower the cost of supplying a good.

Common errors and misconceptions

• Misconception: any rise in quantity supplied is called "an increase in supply". Correct: a rise caused by a higher price is an extension in supply; only a rise caused by a change in a condition of supply (at the same or a lower price) is an increase in supply.
• Misconception: a change in price shifts the whole supply curve. Correct: a change in price moves a point along the existing curve; only a change in a condition of supply shifts the whole curve.
• Misconception: market supply is the average of individual firms' supply. Correct: market supply is the sum (horizontal summation) of every firm's quantity supplied at that price, not an average.
• Misconception: a rise in a tax on a good increases supply because the government is now involved. Correct: a unit tax raises the firm's cost per unit, so it shifts the supply curve to the left (a decrease in supply).
• Misconception: supply only depends on price. Correct: supply depends on price and on the conditions of supply (costs, technology, taxes, subsidies, weather, expectations and the number of firms); the supply curve itself is drawn holding the conditions of supply constant.
• Misconception: an increase in supply always means prices will rise. Correct: an increase in supply is a rightward shift of the supply curve itself; what happens to the market price depends on what demand does at the same time.
• Misconception: if one firm supplies zero at a price, the whole market supplies zero at that price. Correct: other firms with lower minimum supply prices may still supply a positive quantity, so market supply can be positive even if one firm supplies nothing.

Exam-style questions with model answers

Q1. Define 'supply'. [2 marks]

1. Supply is the quantity of a good or service that producers are willing and able to offer for sale.
2. This quantity is stated at a given price, over a given period of time, with other influences on supply held constant.

Q2. The price of a good rises from $8 to $10 a unit, and the quantity supplied rises from 200 to 250 units. Calculate the price elasticity of supply. [2 marks]

1. Percentage change in quantity supplied = (50 ÷ 200) × 100 = 25%.
2. Percentage change in price = (2 ÷ 8) × 100 = 25%, so price elasticity of supply = 25% ÷ 25% = 1.

Q3. State three conditions of supply, other than the price of the good, that could cause a firm's supply curve to shift. [3 marks]

1. A change in the costs of production, such as wages or the price of raw materials.
2. A change in technology used to produce the good.
3. A change in indirect taxes or subsidies applied to the good, such as a government subsidy to producers.

Q4. A firm supplies 30 units of a good at a price of $5. Explain, using the terms 'extension in supply' and 'increase in supply', the difference between the firm supplying 40 units because the price rises to $7, and the firm supplying 40 units at the unchanged price of $5 because of an improvement in technology. [4 marks]

1. In the first case, the rise in quantity supplied, from 30 to 40 units, is caused by a rise in price from $5 to $7.
2. This is called an extension in supply, and it is shown as a movement up along the firm's existing, unchanged supply curve.
3. In the second case, quantity supplied rises to 40 units even though the price has not changed, because the improvement in technology has lowered the firm's costs.
4. This is called an increase in supply, and it is shown as a rightward shift of the whole supply curve to a new position, rather than a movement along the old curve.

Q5. A tax of $3 per unit is placed on a good that a firm produces. Before the tax, the firm supplied 100 units at a price of $20. Explain the likely effect of the tax on the firm's supply curve and on the quantity it supplies at a price of $20. [4 marks]

1. The tax of $3 per unit raises the firm's cost of supplying each unit by $3.
2. This is a change in a condition of supply, not a change in the market price of the good.
3. The firm's whole supply curve shifts to the left, because at every price the firm is now willing to supply less than before.
4. At the unchanged price of $20, the firm will supply fewer than 100 units, because part of the $20 it receives now has to cover the extra tax rather than the firm's own costs and profit.

Q6. At a price of $6 per unit, Firm A supplies 50 units and Firm B supplies 30 units; there are no other firms in this market. Using this information, analyse how a market supply curve is constructed from the supply curves of individual firms. [6 marks]

1. A market supply curve shows the total quantity that all the firms in a market, taken together, are willing to supply at each price.
2. It is found by horizontal summation: adding together, at each price, the quantity that every individual firm in the market would supply at that price.
3. At the price of $6, Firm A supplies 50 units and Firm B supplies 30 units, so market supply at $6 is 50 + 30 = 80 units.
4. This process is repeated at every other price to build up the full market supply schedule, and the resulting price-quantity pairs are plotted to give the market supply curve.
5. The market supply curve lies further to the right than either firm's individual supply curve, because at any given price it shows the sum of both firms' quantities, not just one firm's quantity.
6. If a third firm entered this market, its supply would be added in at each price as well, and the whole market supply curve would shift further to the right.

Q7. Discuss whether a government subsidy paid to farmers is likely to increase the supply of an agricultural good. [6 marks]

1. A subsidy is a payment from the government to producers, usually intended to lower their cost of supplying each unit.
2. By lowering costs, a subsidy is a condition of supply, so it shifts the whole supply curve to the right: farmers are willing to supply more at every price, which is an increase in supply.
3. This effect is likely to be larger where farmers can easily expand output, for example by using more land or labour, in response to the lower net cost of production.
4. However, the effect may be limited for goods whose supply also depends heavily on weather and natural factors, such as rainfall or the length of the growing season, which a subsidy cannot change.
5. The subsidy must also be large enough, and farmers must be aware of it and confident it will continue, for it to noticeably change their supply decisions.
6. Overall, a subsidy is likely to increase supply to some extent, because it directly lowers a condition of supply, but the size of the increase depends on how responsive farmers' output is to cost changes and on natural constraints on production.

Key takeaways

• Supply is the quantity firms are willing and able to sell at a given price in a given period, shown as a supply schedule or a supply curve.
• The law of supply states that quantity supplied usually rises as price rises, other things being equal, giving an upward-sloping supply curve.
• A change in price causes a movement along the supply curve: an extension when price and quantity supplied rise, a contraction when both fall.
• A change in any condition of supply, other than price, shifts the whole supply curve: an increase in supply is a rightward shift, a decrease is a leftward shift.
• Conditions of supply include costs of production, technology, indirect taxes, subsidies, weather, government regulation, the number of firms and producers' expectations.
• Market supply is found by horizontal summation: adding together the quantity each individual firm supplies at the same price.
• Higher costs of production or new taxes usually shift the supply curve left; better technology or new subsidies usually shift it right.
• More firms entering a market shifts market supply to the right; firms leaving shifts it to the left.

Test yourself

What does a point on a supply curve show?

It shows the quantity of a good that firms are willing and able to supply at one particular price, with all conditions of supply held constant.

What is the difference between an extension in supply and an increase in supply?

An extension is a rise in quantity supplied caused by a rise in price, shown as a movement along the curve; an increase is a rightward shift of the whole curve caused by a change in a condition of supply.

How is market supply calculated from individual firms' supply?

By horizontal summation: at each price, add together the quantity that every firm in the market is willing to supply at that price.

Name two conditions of supply that would shift a supply curve to the left.

A rise in the cost of a factor of production, such as wages, and the imposition of a tax per unit sold on the good.

What effect does an improvement in technology usually have on a firm's supply curve?

It usually lowers the firm's costs of production, so the firm supplies more at every price, shifting the supply curve to the right.

If two firms each supply zero units at a price of $3, what is market supply at that price?

Zero, because market supply is the sum of each firm's supply at that price, and both firms are supplying nothing at $3.

What happens to a firm's supply curve if the government removes a subsidy it was paying producers?

The firm's net cost of supplying each unit rises, so the supply curve shifts to the left, a decrease in supply.