- 🔍 What is Supply?
- Supply schedules and curves
- Individual supply schedule and individual supply curve
- Market supply schedule and market supply
- Supply Curve: Movements and Shifts
- Movement along the supply curve
- Causes of Shifts in Supply Curves
- let’s explore how these determinants of supply can shift the supply curve to the right:
- let’s explore how these determinants of supply can shift the supply curve to the left:
- Test Your Knowledge with Scenarios
- Knowledge checkpoint: Answer these actual Higher Economics exam questions:
🔍 What is Supply?
- Higher Price = Higher Quantity Supplied
- Lower Price = Lower Quantity Supplied
💡 Why Does This Happen? Higher prices provide a profit incentive for firms to expand production. Thus, there is a positive relationship between price and quantity supplied.
🍎 For example, if a farmer finds that the price for apples has risen, they will likely decide to supply more apples because the higher price makes it more profitable to do so.
Supply schedules and curves
👉 Similar to a demand schedule, A supply schedule is a table that shows the quantity supplied at each price.
- Individual supply Schedule: This is a table that shows the quantities of a good that a single producer is willing to supply at different prices. A graphical representation of the individual supply schedule is called the individual supply curve.
- Market supply Schedule: This is a table that shows the total quantities of a good that all producers in a market are willing to supply at different prices. A graphical representation of the market supply schedule is called the market supply curve.
The x-axis represents the quantity supplied, while the y-axis shows the price per unit. As the price increases, the quantity supplied generally increases, reflecting the law of supply.
Individual supply schedule and individual supply curve
Imagine there's only one farmer, Steve, who sells amazing apples. Here's an example of the quantity supplied for Steve at different prices:
Price per lb (in £) | Quantity Supplied (in lb) |
1.00 | 50 |
1.50 | 70 |
2.00 | 100 |
2.50 | 130 |
3.00 | 160 |
3.50 | 200 |
We can use this supply schedule to compute a supply cure:
Market supply schedule and market supply
Let's imagine there are now three farmers in the market: Steve, Sophie, and Chris. To calculate the market supply, we add up each farmer's individual supply of apples to get the total supply available in the market. Here is an example of the market supply schedule:
We can then use the market supply schedule to show the market supply curve:
Supply Curve: Movements and Shifts
A shift in the supply curve means that at the exact same price, producers are willing to supply more or less of a good due to factors other than the price of the good.
A movement along the supply curve occurs following a change in price, showing how the quantity supplied changes as the price changes.
Movement along the supply curve
Initial Market Condition:
- 🍏 The current price of apples is £2 per lb.
- 🚜 At this price, Farmer A is willing to supply 100 pounds of apples.
Price Increase:
- Say the price of apples increases to £3 per lb.
- 📈 The increase in quantity supplied due to an increase in the price of the product is known as the expansion of supply. When the price of a product rises and other factors affecting supply remain the same, it leads to an expansion of supply.
- 📊 At the new price of £3 per lb, Farmer A is now willing to supply 160 lb of apples.
Price Decrease:
- Say the price of apples reduces to £1 per lb.
- 📉The decrease in quantity supplied due to an decrease in the price of the product is known as the contraction of supply. When the price of a product fall and other factors affecting supply remain the same, it leads to an contraction of supply.
- 📊 At the new price of £1 per lb, Farmer A is now willing to supply 40 lb of apples.
Conversely, if prices decrease, suppliers may supply less because they earn less per unit sold. In both cases, profit is the key factor driving suppliers' decisions.
If the scenario describes changes in factors other than the price (e.g., technology, input costs, number of producers), this indicates a shift in the supply curve.
Causes of Shifts in Supply Curves
Definition: Determinants of supply are changes in conditions that cause the supply curve to shift either to the left or right.
let’s explore how these determinants of supply can shift the supply curve to the right:
Determinants of supply and shifting right the supply curve:
- 📉 Cost of Factors of Production: If the cost of production falls, supply will increase. For example, if the price of steel drops, car manufacturers can produce more cars at a lower cost.
- 🔧 Technology: New technology will increase the supply of a product. For example, automation in factories allows manufacturers to produce more electronics efficiently.
- 🌞 Weather: Good weather increases the output of agricultural products. For example, a favorable growing season results in a bumper crop of wheat.
- 💸 Taxes: If taxes are imposed on imported goods, domestic firms will be encouraged to increase supply. For example, tariffs on foreign steel may lead domestic steel producers to ramp up production.
- 🎁 Subsidies: Payment of subsidies or grants encourages firms to increase supply. For example, government subsidies for renewable energy projects boost the production of solar panels.
- 🔄 Prices of Substitute Goods: If the prices of substitute goods increase, firms may divert resources to produce the higher-priced goods. For example, if the price of soybeans rises, farmers may plant more soybeans instead of corn.
- 🔮 Expectations of Price Changes: If producers expect prices to rise in the future, they might increase current production. For example, if oil producers expect higher future oil prices, they might pump more oil now.
- 🔗 Goods in Joint Supply: An increase in the supply of one good will lead to an increased supply of its by-product. For example, increased beef production also boosts the supply of leather.
let’s explore how these determinants of supply can shift the supply curve to the left:
Determinants of supply and shifting left the supply curve:
- 📈 Cost of Factors of Production: If the cost of production rises, supply will decrease. For example, if the price of crude oil increases, the cost of producing plastic products rises, reducing supply.
- 🛠️ Technology: Outdated or failing technology can decrease the supply of a product. For example, a breakdown in machinery can reduce the production capacity of a factory.
- 🌩️ Weather: Poor weather can decrease the output of agricultural products. For example, a drought can significantly reduce the supply of corn.
- 💰 Taxes: Higher taxes on production can decrease supply. For example, an increase in corporate taxes may lead manufacturers to cut back on production.
- 🚫 Subsidies: Removal or reduction of subsidies can decrease supply. For example, if the government removes subsidies for electric vehicles, the supply of electric cars may decrease.
- 🔀 Prices of Substitute Goods: If the prices of substitute goods decrease, firms may shift resources away, reducing the supply of the original goods. For example, if the price of cotton drops, textile companies might produce less synthetic fabric.
- 🔮 Expectations of Price Changes: If producers expect prices to fall in the future, they might reduce current production. For example, if farmers expect the price of wheat to drop, they might plant less wheat now.
- 🛑 Goods in Joint Supply: A decrease in the supply of one good can lead to a decreased supply of its by-product. For example, a reduction in crude oil extraction can also reduce the supply of petroleum by-products like gasoline.
Test Your Knowledge with Scenarios
These questions will test your ability to understand and analyse shifts in supply curves. Pay close attention to the details provided in the case study.
Practice drawing supply curves for scenarios like the ones below to prepare effectively 👇
Situation: A technological breakthrough has improved the efficiency of wheat farming, allowing farmers to produce more wheat at a lower cost.
Question: "Draw a diagram to show the effect on the supply of wheat due to the technological advancement."
Situation: A significant increase in the price of natural gas makes it a more profitable alternative for energy companies, leading them to divert resources away from coal production to natural gas extraction.
Question: "Draw a diagram to show the effect on the supply of coal due to the increased profitability of natural gas."
Situation: Due to increased consumer demand, the price of handmade candles rises significantly.
Question: "Draw a diagram to show the effect on the quantity supplied of handmade candles as a result of the price increase."