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O LevelEconomicsCambridge (CIE)Revision Notes2. The Allocation of Resources2.4 SupplyConditions of Supply

Conditions of Supply (Cambridge (CIE) O Level Economics)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Shifts of the Supply Curve

  • 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

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

Graph showing supply curves shifting. Initial curve S shifts left to S1 at reduced quantity and right to S2 at increased quantity, price remains at £7.
A graph that shows how changes to any of the conditions of supply shifts the entire supply curve left or right, irrespective of the price level

  • For example, 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

How Each of the Conditions of Supply Shifts the Entire Supply Curve

Costs of Production (COP)

  • If the price of raw materials or other costs of production change, firms respond by changing supply. 

  • COP increases

    • S decreases

      • Shifting left

      • (S→S1)

  • COP decreases

    • S increases

      • Shifting right

      • (S→S2)

Indirect Taxes

  • Any changes to indirect taxes change the cost of production for a firm and impact supply.

  • Taxes increase

    • S decreases

      • Shifting left

      • (S→S1)

  • Taxes decrease

    •  S increases

      • Shifting right

      • (S→S2)

Subsidies

  • Changes to producer subsidies directly impact the cost of production for the firm.

  • Subsidy increases

    • S increases

      • Shifting right

      • (S→S2)

  • Subsidy decreases

    • S decreases

      • Shifting left

      • (S→S1)

New Technology

  • New technology increases productivity and lowers costs of production.

  • Ageing technology can have the opposite effect.

  • Technology increases

    • S increases

      • Shifting right

      • (S→S2)

  • Technology decreases

    • S decreases

      • shifting left

      • (S→S1)

Change in the number of firms in the industry

  • The entry and exit of firms into the market has a direct impact on the supply.

  • If ten new firms start selling building materials in Hanoi, the supply of building material will increase.

  • No. of firms increases

    • S increases

      • Shifting right

      • (S→S2)

  • No. of firms decreases

    • S decreases

      • Shifting left

      • (S→S1)

Weather Events

  • Droughts or flooding can cause a supply shock in agricultural markets.

  • A drought will cause supply to decrease.

  • Unexpectedly good growing conditions can cause supply to increase.

  • Drought

    • S decreases

      • Shifting left

      • (S→S1)

  • Good weather

    • S increases

      • Shifting right

      • (S→S2)

Examiner Tips and Tricks

Several of the conditions of supply change the costs of production. However, be sure to explain each condition as its own point before linking it to the cost of production (for example, a change in indirect taxation).

A common error by students is to explain that a subsidy (for example, £3,000 subsidy for each electric vehicle produced) shifts the demand curve for electric vehicles to the right. This is incorrect. The subsidy will shift the supply curve to the right. Then due to the lower price, there will be a movement along the demand curve (extension of quantity demanded) to create a new market equilibrium.

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    Author
    Reviewer
    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Jenna Quinn

    Author: Jenna Quinn

    Expertise: Head of New Subjects

    Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.