Supply - Economics - Pearson A-Level

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Welcome to Markets in Action: Understanding Supply

Hello future economist! You’ve already explored the fascinating world of Demand—how consumers behave. Now, we flip the coin and look at the producers. This chapter is all about Supply: the decisions firms make about how much to produce and sell.

Understanding supply is crucial because it’s the second half of the puzzle. When supply and demand meet, we determine the market price and quantity. If you master this chapter, you’ll be ready to analyze how real-world events (like a rise in oil prices or a new technological breakthrough) affect the marketplace.

1. Defining Supply and the Law of Supply

1.1 What Exactly is Supply?

In simple terms, Supply refers to the amount of a good or service that producers are willing and able to offer for sale at various prices over a specific period.

Willingness: The firm must want to sell it (it must be profitable).
Ability: The firm must have the resources, capacity, and inputs (like labour and raw materials) to produce it.

Key Term Distinction:

Supply (S): The entire relationship between price and the quantity producers are willing to sell (the entire curve).
Quantity Supplied ($Q_s$): A specific amount offered for sale at a single, specific price (a single point on the curve).

1.2 The Law of Supply

The Law of Supply states that, ceteris paribus (all other things being equal), as the price of a good or service rises, the quantity supplied increases, and conversely, as the price falls, the quantity supplied decreases.

Why is this relationship positive?

Producers are motivated by profit. If the market price for a product increases, selling that product becomes more profitable. Therefore, existing firms will increase production, and new firms may be encouraged to enter the market, leading to a higher overall quantity supplied.

Analogy: Imagine you run a lemonade stand. If the market price for lemonade rises from \$1 to \$5 per cup, you are much more motivated to spend hours squeezing lemons and producing more cups!

Quick Review Box:

Law of Supply: Price $\uparrow$ $\rightarrow$ $Q_s$ $\uparrow$ (and vice versa)

2. Visualising Supply: The Curve

2.1 The Supply Schedule and Curve

A Supply Schedule is a table showing the relationship between different prices and the quantity supplied at each price.

When we plot this schedule on a graph, we get the Supply Curve (S).

The vertical axis (Y-axis) measures Price (P).
The horizontal axis (X-axis) measures Quantity (Q).

Because of the Law of Supply, the curve slopes upwards and to the right (it has a positive slope).

2.2 Individual Supply vs. Market Supply

The Individual Supply curve shows the supply of a single firm. The Market Supply curve shows the total quantity supplied by all firms in the market combined.

Step-by-Step for Market Supply:

The Market Supply curve is derived by horizontally summing the individual supply curves of all producers in the market. At any given price, you add up the $Q_s$ of Firm A, Firm B, Firm C, and so on, to get the total market $Q_s$.

Did you know? Economists often represent supply as a function: $Q_s = f(P)$. This simply means the quantity supplied is a function of, or depends on, the price.

3. Changes in Supply: Movements vs. Shifts (A Critical Distinction)

This is where students often get confused! Remember that only one factor causes a movement along the supply curve, while many non-price factors cause the curve to shift.

3.1 Movement Along the Supply Curve

A Movement Along the Supply Curve (a change in Quantity Supplied) is caused ONLY by a change in the product’s OWN PRICE.

An increase in price leads to an Extension of Supply (moving up the curve).
A decrease in price leads to a Contraction of Supply (moving down the curve).

Encouragement: Don’t worry if this seems tricky at first. Just remember: Price = Movement.

3.2 Shifts of the Supply Curve

A Shift of the Supply Curve (a change in Supply) is caused by a change in any factor other than the product's own price. These are called the determinants of supply or non-price factors.

The entire curve moves either right or left:

Shift to the Right (S to $S_1$): This means supply has increased. At every price, producers are now willing and able to sell more.
Shift to the Left (S to $S_2$): This means supply has decreased. At every price, producers are now selling less.

Common Mistake to Avoid: Never say a "change in price causes a shift." A change in price *only* causes a movement.

4. The Determinants of Supply (The Shifters)

These non-price factors determine the position of the supply curve. They affect the firm’s costs or their potential profitability.

If the determinant makes production cheaper or more profitable, supply increases (Shift Right).
If the determinant makes production more expensive or less profitable, supply decreases (Shift Left).

4.1 Costs of Production (COP)

This includes wages, raw materials, energy prices, and rent.

If COP $\uparrow$: Profit per unit falls. Firms are less willing to supply. $\rightarrow$ Supply Decreases (Shift Left).
If COP $\downarrow$: Profit per unit rises. Firms are more willing to supply. $\rightarrow$ Supply Increases (Shift Right).

Example: A major global increase in oil prices raises transport costs for almost all businesses. This increases their COP, causing the supply curves for most goods to shift left.

4.2 Technology

Technological improvements usually lead to increased efficiency.

Technology $\uparrow$: Firms can produce the same output with fewer inputs (lower COP). $\rightarrow$ Supply Increases (Shift Right).

Example: The introduction of robotic assembly lines in car manufacturing dramatically reduced the cost and time required to build a vehicle, shifting the supply curve for cars far to the right.

4.3 Government Intervention (Taxes and Subsidies)

Governments influence supply directly through fiscal policies.

A. Indirect Taxes (e.g., VAT, Excise Duty):

Taxes are treated by firms as an additional cost of production.

Tax $\uparrow$: COP effectively rises. $\rightarrow$ Supply Decreases (Shift Left).

B. Subsidies:

A subsidy is a grant of money paid by the government to a producer to lower the cost of production.

Subsidy $\uparrow$: COP effectively falls. $\rightarrow$ Supply Increases (Shift Right).

4.4 Prices of Related Goods

Changes in the prices of other goods can affect the supply of the good in question, depending on whether the goods are produced in competition or jointly.

A. Competitive Supply (Substitute in Production):

These are goods that use similar resources and can be produced instead of one another (e.g., wheat or barley grown on the same land).

If the Price of Wheat $\uparrow$, farmers will switch resources away from Barley to produce more profitable Wheat. $\rightarrow$ Supply of Barley Decreases (Shift Left).

B. Joint Supply (Complements in Production):

These are goods that are produced simultaneously (e.g., crude oil production naturally yields petrol, diesel, and bitumen).

If the Price of Petrol $\uparrow$, crude oil companies increase overall oil extraction. $\rightarrow$ Supply of Bitumen Increases (Shift Right).

4.5 Producer Expectations

What producers believe will happen to prices in the future affects their current supply decisions.

If producers expect prices to rise in the near future, they may hold back current supply to sell later at a higher profit. $\rightarrow$ Current Supply Decreases (Shift Left).
If producers expect prices to fall in the near future (e.g., seasonal sales approaching), they may rush to sell now. $\rightarrow$ Current Supply Increases (Shift Right).

4.6 Number of Firms in the Market

This affects market supply directly.

More firms entering the market $\rightarrow$ Market Supply Increases (Shift Right).
Firms exiting the market $\rightarrow$ Market Supply Decreases (Shift Left).

Memory Aid: To remember the key shifters, you can adapt a simple mnemonic: Technology, Intervention (Taxes/Subsidies), Number of Firms, Costs (COP), Expectations, Related Goods (TINCER).

Summary: Quick Review of Supply

Key Takeaways

The Law of Supply dictates a positive relationship between Price and Quantity Supplied ($Q_s$).
The Supply Curve slopes upwards.
A change in the product’s Own Price causes a Movement (Change in $Q_s$).
A change in Non-Price Factors (Determinants) causes a Shift (Change in S).
To remember the direction of a shift: If it improves profitability/reduces costs, the curve shifts Right (Increase). If it reduces profitability/increases costs, the curve shifts Left (Decrease).

You have now mastered the concepts of Supply! Now, you are ready to put demand and supply together to determine equilibrium.

Keep up the fantastic work! Economics is all about understanding these relationships.