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

Revision Note

Author

Steve Vorster

Expertise

Economics & Business Subject Lead

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)

Exam Tip

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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