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This lesson covers the theory of supply — the other fundamental building block of market analysis alongside demand. You will learn about individual and market supply, the law of supply, movements along versus shifts of the supply curve, and the conditions (determinants) of supply. A thorough understanding of supply is essential for analysing how markets work at A-Level.
Key Definition: Supply is the quantity of a good or service that producers are willing and able to offer for sale at a given price, in a given time period.
Just as with demand, both willingness and ability are required. A firm may wish to supply a product, but if it lacks the raw materials, labour, or technology, it cannot do so.
Key Definition: The law of supply states that, ceteris paribus, as the price of a good rises, the quantity supplied rises, and vice versa. There is a direct (positive) relationship between price and quantity supplied.
The upward slope of the supply curve can be explained by two factors:
Profit motive: Higher prices make production more profitable, incentivising existing firms to produce more and potentially attracting new firms into the market.
Increasing marginal costs: As firms increase output, they eventually face rising marginal costs due to the law of diminishing returns (in the short run). Firms are only willing to supply additional units if the price is high enough to cover these higher marginal costs. The supply curve can therefore be thought of as reflecting the marginal cost curve of the industry.
Exam Tip: When explaining why the supply curve slopes upward, link it to costs and profit. A common strong answer: "At higher prices, firms can cover higher marginal costs and earn greater profits, incentivising them to supply more."
For example, if at a price of £10, Firm A supplies 50 units and Firm B supplies 70 units, the market supply at £10 is 120 units. The market supply curve is obtained by adding the quantities supplied by all firms at each price level.
A supply schedule is a table showing the quantity supplied at different price levels:
| Price (£) | Quantity Supplied (units per week) |
|---|---|
| 1 | 10 |
| 2 | 30 |
| 3 | 50 |
| 4 | 70 |
| 5 | 90 |
Plotting these values with price on the vertical axis and quantity on the horizontal axis gives the supply curve, which slopes upward from left to right.
Key Definition: A movement along the supply curve occurs when there is a change in the quantity supplied caused by a change in the good's own price, ceteris paribus.
| Term | Meaning | Cause |
|---|---|---|
| Extension of supply | Quantity supplied increases | Price rises |
| Contraction of supply | Quantity supplied decreases | Price falls |
| Increase in supply | The whole curve shifts right | Non-price factor changes |
| Decrease in supply | The whole curve shifts left | Non-price factor changes |
Exam Tip: As with demand, precise terminology is vital. A "change in quantity supplied" (movement along the curve) is not the same as a "change in supply" (shift of the curve). Examiners look for this distinction.
Key Definition: A shift of the supply curve occurs when there is a change in supply at every price level, caused by a change in a non-price factor (a condition of supply).
A shift to the right means more is supplied at every price (increase in supply). A shift to the left means less is supplied at every price (decrease in supply).
The following non-price factors cause the supply curve to shift:
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