0455 · 2.3Supply

Supply, schedules and curves

0:00Imagine a bakery deciding how many loaves to offer for sale tomorrow. A higher selling price could encourage it to bake more, while dearer flour pushes it the other way. Both decisions involve supply, but they appear differently on a diagram. By the end, you will understand the difference between movements along a supply curve and shifts of that curve. Supply concerns producers, rather than buyers. Firms use resources such as labour, materials and machinery to provide goods or services.

0:25Their decisions depend partly on the selling price and partly on production conditions. We will separate those influences by changing one factor at a time, while assuming the others remain unchanged. Supply is the willingness and ability of producers to sell a good or service at a given price in a given time period. Both parts matter. A baker might want to offer more bread but lack enough ovens. Equally, having spare equipment does not mean extra production would be worthwhile at the current selling price.

0:52The time period also matters because a quantity alone gives an incomplete picture. Offering thirty loaves each day is different from offering thirty each month. Supply describes what producers are prepared to offer, not necessarily what customers actually purchase. We therefore need to specify the product, its price and the period being considered. Individual supply refers to the amount offered by one producer. In this example, Sunrise Bakery offers ten loaves daily at two dollars each.

1:18At three dollars, it offers twenty loaves, while a price of four dollars encourages thirty. These figures form a supply schedule, showing the quantities offered at different possible prices. Suppose Hilltop Bakery offers five loaves daily at two dollars, ten at three dollars, and fifteen at four dollars. Assume these are the only bakeries in this market. Market supply is the sum of the quantities all individual firms offer at each price.

1:42That is the link between individual supply and market supply, because both businesses sell loaves in the same market. At two dollars per loaf, ten plus five gives a market supply of fifteen loaves per day. The three-dollar row adds twenty and ten, making thirty loaves daily. Forty-five loaves a day are offered at four dollars, since thirty plus fifteen equals forty-five. Each addition combines quantities at the same price, rather than adding quantities from different rows.

2:07We can turn that schedule into a supply diagram. Put price on the vertical axis and quantity supplied on the horizontal axis. Plot each price with its matching quantity, then draw the supply curve through the points and label it S. Here, the upward-sloping line shows that a higher price is associated with a greater quantity offered for sale. The upward slope has an economic explanation. With production conditions unchanged, a higher selling price makes additional output more profitable to produce.

2:33The bakery might pay for extra working hours or use equipment that was previously idle. A lower price makes some of that production less worthwhile, so the business offers fewer loaves. A supply curve therefore represents several possible decisions, not just one observed quantity. Each point shows what producers would offer at a particular price under the same production conditions. It need not be a perfectly straight line. For these diagrams, the important relationship is that it slopes upwards from left to right.

Movements and shifts in supply

3:01When the good’s own price changes, we move along its existing supply curve. Suppose bread goes up from two dollars to three dollars per loaf. Our market quantity supplied then grows from fifteen to thirty loaves daily. This is an extension in supply, shown by moving upwards and right along the same curve. If the price falls from three dollars back to two dollars, the quantity offered drops from thirty to fifteen loaves daily.

3:23We call this a contraction in supply. The movement is downwards and left along the existing curve. Nothing about the bakeries’ costs, equipment or number has changed in either case. The word own is important when identifying the cause. A change in the price of bread causes movement along the bread supply curve. Flour, however, is an input used to make bread. A change in flour prices alters production costs, so it changes the quantities bakers would offer at each possible bread price.

3:49Suppose flour becomes cheaper while the selling price of bread stays unchanged. Production is now less costly, so supplying additional loaves becomes more profitable. Bakers offer more at that price, and also at other possible prices. This is an increase in supply, represented by shifting the whole curve to the right. If flour becomes more expensive, the reverse happens. Some output is no longer worthwhile at the previous selling price.

4:13Producers offer less at each possible price, so the curve shifts left. This is a decrease in supply, not a contraction, because the cause is a change in production conditions rather than bread’s own price. Read a shift diagram by comparing quantities at the same price. A horizontal line crosses the original curve and the new one. After a rightward shift, the new intersection lies further right, showing more output.

4:35A leftward shift gives a smaller quantity. This comparison isolates the change in supply without introducing any change in selling price.

Causes of supply shifts

4:42The causes of increases and decreases in supply begin with production costs, such as wages, raw materials and energy. Higher wages raise labour costs if productivity remains unchanged, while more expensive electricity increases the cost of operating ovens. These cost increases shift supply to the left. Lower input costs work in the opposite direction because producing each unit becomes more profitable at an unchanged selling price. Technology and productivity can also change production conditions.

5:11Productivity concerns output per unit of input, such as loaves produced per worker each hour. A more efficient oven could allow the bakery to produce more using the same resources. If this reduces production costs, the firm can profitably offer more at each price, shifting supply right. An indirect tax is a tax on spending on goods and services. For example, a tax on each loaf sold reduces what the producer retains from its selling price.

5:35Offering that output becomes less profitable, so supply decreases. We show this as a leftward shift, comparing quantities at each unchanged selling price. A subsidy is a payment from the government to producers that lowers their costs. A payment for each loaf produced helps cover the bakery’s costs. At the same selling price, more output becomes worthwhile, so supply increases and the curve shifts right. The explanation concerns the producer’s incentive, rather than a direct change in customers’ willingness to buy.

6:03Natural conditions are especially important in agriculture. Favourable weather can improve harvests, allowing farmers to offer more crops at each price. Drought, flooding or another natural disaster can damage crops and reduce available output. Here, a leftward shift reflects reduced ability to supply, even if farmers remain willing to sell. The number of firms affects market supply because it combines every producer’s contribution. When additional bakeries enter, their output adds to the quantities offered by existing businesses at each price.

6:31Market supply therefore increases, assuming other conditions remain unchanged. If firms leave the market, removing their contribution shifts the market curve left. Producers can sometimes choose between different products using the same resources. For example, a farmer could use land to grow wheat or barley. If barley becomes more profitable because its price rises, the farmer might transfer land away from wheat. Wheat supply then decreases, even though wheat’s own price has not changed.

6:58Environmental regulation can affect supply through production costs. Requiring a factory to install pollution control equipment could raise costs and shift its supply curve left. That does not establish whether the regulation is desirable overall, because cleaner air also has benefits. If cleaner technology later reduces energy costs, it could instead help increase supply.

Avoiding errors and exam application

7:17The most common confusion is treating every larger quantity as an increase in supply. A higher own price causes an extension along the existing curve, because its original production conditions still apply. By contrast, an increase in supply means more is offered at each price. The deciding issue is what caused the change, not simply whether quantity became larger. Another mistake is assuming that all price changes produce movements along the curve.

7:41The product’s own price must be distinguished from input prices and prices of alternative products. Costlier flour changes bread production conditions, while a higher barley price can redirect farmland away from wheat. Both can shift the relevant curve without any change in that product’s own price. In Paper One Multiple Choice, identify the cause before choosing a diagram or term. Paper Two Structured Questions can ask you to define supply, explain a change or draw its effect.

8:07Define asks for a precise meaning, while state requires a clear expression. When you explain, give the economic reason and show how it produces the requested outcome. Consider this exam-style question: explain how a rise in coffee bean costs affects the supply of café drinks. First identify coffee beans as an input, rather than the finished product. Their higher cost changes production conditions, so we need a shift rather than movement along the original curve.

8:33The direction follows from the effect on profitability. Dearer coffee beans raise the cost of producing each drink. At an unchanged selling price, every drink becomes less profitable. Cafés therefore offer fewer drinks at each possible price. This is a decrease in supply, so the curve shifts to the left. At the original price, the quantity supplied is now smaller. Supply connects producers’ willingness and ability with price over a specified time period.

8:58Market supply adds individual firms’ quantities at each price. A change in the good’s own price causes an extension or contraction along the curve. Changes in production conditions shift the whole curve, with increases to the right and decreases to the left. Keep the cause separate from the result whenever you interpret a question. A higher selling price makes additional production more worthwhile under existing conditions. Lower costs or better productive capacity change what firms can offer at every price.

9:25Understanding that distinction lets you explain the diagrams rather than simply memorise their shapes.