Supply Curves (AQA A Level Economics)

An Introduction to Supply

• Supply is the amount of a good/service that a producer is willing and able to supply at a given price in a given time period

• A supply curve is a graphical representation of the price and quantity supplied by producers

  • If the data were plotted, it would be an actual curve. Economists, however, use straight lines so as to make analysis easier

• The supply curve is sloping upward as there is a positive relationship between the price and quantity supplied (QS)

  • Rational profit maximising producers would want to supply more as prices increase in order to maximise their profits

• The law of supply states that there is a positive (direct) relationship between quantity supplied and price, ceteris paribus

  • When the price rises, the QS rises

  • When the price falls, the QS falls

Individual and Market Supply

• Market supply is the combination of all the individual supply for a good/service

  • It is calculated by adding up the individual supply at each price level  

The Monthly Market Supply of Bread from 4 Bakeries in a Small town

Diagram: Individual & Market Supply Curves 

Diagram analysis

• In New York City, the market supply for smart phones in December is predominantly a combination of iPhone and Samsung supply

• At a price of $1000, the supply of iPhones is 300 units and the supply of Samsung phones is 320 units

• At a price of $1,000, the market supply of smart phones in New York City during December is 620 units

Movements Along a Supply Curve

• If price is the only factor that changes (ceteris paribus), there will be a change in the quantity supplied (QS)

  • This change is shown by a movement along the supply curve

Diagram: Movement Along a Supply Curve   

Diagram analysis

• An increase in price from £7 to £9 leads to a movement up the supply curve from point A to B

  • Due to the increase in price, the quantity supplied has increased from 10 to 14 units

  • This movement is called an extension in QS
    

• A decrease in price from £7 to £4 leads to a movement down the supply curve from point A to C

  • Due to the decrease in price, the quantity supplied has decreased from 10 to 7 units

  • This movement is called a contraction in QS

The Conditions of Supply

• There are several factors that will change the supply of a good/service, irrespective of the price level. Collectively, these factors are called the conditions of supply and include:

  • Changes to the costs of production

  • Changes to indirect taxes and subsidies

  • Changes to technology

  • Changes to the number of firms

  • Weather events

  • Future price expectations

  • Goods in joint and competitive supply

• Changes to any of the conditions of supply shift the entire supply curve (as opposed to a movement along the supply curve)

Diagram: Shift of the Supply Curve

• E.g. If a firm's cost of production increases due to the increase in price of a key resource, then there will be a decrease in supply as the firm can now only afford to produce fewer products

  • This is a shift in supply from S to S₁. The price remains unchanged at £7 but the supply has decreased from 10 to 2 units

An Explanation of how each of the Conditions of Supply Shifts the Entire Supply
Curve at Every Price Level