Supply

Supply is the quantity of a good or service producers are willing AND able to provide at each price level, over a given period.

The law of supply. As price rises, quantity supplied rises. As price falls, quantity supplied falls. Ceteris paribus.

Why the law holds — two reasons:

1. Profit motive. A higher price means a higher profit margin per unit (assuming costs unchanged). Existing producers respond by producing more — running extra shifts, working overtime, expanding output.

2. New entrants. A higher price makes the market more attractive. New firms ENTER the market, raising total quantity supplied. Conversely, a falling price drives marginal firms OUT.

The supply curve. Price on the vertical axis; quantity on the horizontal. The curve slopes UP from left to right.

Cambridge tip. Mark schemes for "explain the law of supply" reward EITHER the profit motive OR new entrants for partial credit. BOTH for full marks.

1. Costs of production. The most important shift factor.

• Wages, raw materials, energy, rent.
• Costs UP → profit per unit DOWN → supply falls → curve shifts LEFT.
• Costs DOWN → curve shifts RIGHT.

Worked example. Oil price spike → trucking companies' fuel costs rise → curve shifts left for goods that depend on road transport.

2. Technology.

• Better technology → more output per unit of input → costs effectively fall → curve shifts RIGHT.
• e.g., automation in manufacturing.

3. Indirect taxes and subsidies.

• Indirect tax (VAT, excise duty) → effective cost rises → curve shifts LEFT.
• Subsidy (government payment to producers) → effective cost falls → curve shifts RIGHT.

4. Number of producers in the market.

• More producers → more total supply at every price → curve shifts RIGHT.
• Firms exiting (going bankrupt or to other markets) → curve shifts LEFT.

5. Time period. In the short run, supply may be relatively inelastic (hard to expand quickly). In the long run, more elastic (firms can build new factories, train new workers).

6. Weather (for agricultural goods). Good weather → high yield → curve shifts right. Drought → curve shifts left.

7. Expectations of future prices. If producers expect prices to RISE, they may HOLD BACK current supply (shift left now) to sell later for more.

Cambridge tip. Mark schemes for 8-mark "shift the supply curve" questions expect 4 distinct factors. The most-rewarded are costs, technology, taxes/subsidies, number of firms.

Individual supply is the quantity ONE firm is willing and able to supply at each price.

Market supply is the TOTAL quantity ALL firms in the market are willing and able to supply at each price — calculated by summing individual supply curves HORIZONTALLY at each price level.

Worked example. At $10:

• Firm A supplies 100 units.
• Firm B supplies 80 units.
• Firm C supplies 120 units.

Market supply at $10 = 100 + 80 + 120 = 300 units.

Repeat for every price → market supply curve.

Implication. A market with more firms has higher supply at every price. Entry of new firms shifts market supply right.