Supply represents the quantity of a good or service that producers are willing and able to sell at different prices over a period of time.
Introduction to supply
Supply is a fundamental concept in economics that refers to how much of a good or service producers are both willing and able to offer for sale across different price points over a specific time period. Unlike demand, which reflects consumer behaviour, supply reflects producer decisions, motivations, and constraints. It is shaped by the interplay between profitability, production costs, and market conditions, forming a critical component of how markets function.
Definition of supply
Supply is defined as the quantity of a good or service that producers are prepared to offer for sale at various prices, during a particular period of time, assuming all other factors remain constant (ceteris paribus). Producers are generally incentivised to supply more of a good when the price rises because the potential for profit increases. Conversely, when prices fall, supply usually decreases as the opportunity to cover costs and generate revenue diminishes.
The key assumption underpinning supply is that producers aim to maximise profit. When prices rise, the revenue per unit sold increases, encouraging producers to increase production where feasible.
The supply curve
The supply curve is a graphical representation of the relationship between the price of a good and the quantity supplied. It is typically upward sloping, indicating a positive correlation: as price increases, quantity supplied increases.
Characteristics of the supply curve:
Upward slope: Reflects the law of supply – higher prices incentivise greater output.
X-axis (horizontal): Represents the quantity supplied.
Y-axis (vertical): Represents the price of the good or service.
Ceteris paribus: The curve assumes all other factors affecting supply are held constant.
This graphical representation helps to visualise how producers respond to price changes and how supply levels are determined in different price environments.
Movements along the supply curve
Movements along the supply curve are caused solely by changes in the price of the good or service itself, assuming other factors remain constant.
Extension of supply:
An extension occurs when there is an increase in price, leading to an increase in the quantity supplied. This is shown as a movement up the supply curve.
Contraction of supply:
A contraction occurs when the price falls, leading to a decrease in the quantity supplied. This is represented by a movement down the curve.
Important distinction: These movements are not shifts of the curve. The supply curve itself remains in place; the movement occurs along the existing curve due to price changes.
Example:
A bakery sells more bread as the market price rises from £1 to £1.50 per loaf. The quantity supplied rises in response to the higher price.
Shifts in the supply curve
A shift in the supply curve occurs when there is a change in any of the non-price determinants of supply. In these cases, producers are willing to supply more or less of the good at all price levels.
Rightward shift (increase in supply):
Occurs when producers are willing and able to supply more at every price. This could be due to lower production costs, technological improvements, or favourable government policies.
Leftward shift (decrease in supply):
Occurs when producers are willing and able to supply less at every price. This might be the result of rising input costs, new taxes, or reduced productivity.
A shift means that the entire supply curve moves to the left or right, as opposed to a movement along the existing curve.
Factors that shift the supply curve (conditions of supply)
Several key non-price factors influence supply. These are referred to as the conditions of supply, and any change in these will shift the supply curve.
1. Changes in production costs
When the cost of production falls, such as through cheaper raw materials or reduced wages, it becomes more profitable for firms to supply goods, shifting supply to the right.
Conversely, rising production costs reduce profitability and may decrease supply, shifting the curve to the left.
Examples:
A drop in the price of oil reduces energy and transportation costs, encouraging increased production.
An increase in wages or input prices discourages supply due to higher costs.
2. Technology
Technological progress improves production efficiency, reducing the average cost per unit.
This encourages firms to increase output at every price level, shifting the supply curve to the right.
Example:
A car manufacturer introducing robotic assembly lines can produce more cars at a lower cost.
3. Taxes and subsidies
Indirect taxes such as VAT or excise duties increase production costs, reducing supply (leftward shift).
Subsidies are government payments to firms that lower production costs, encouraging more supply (rightward shift).
Example:
A sugar tax increases costs for soft drink producers, reducing their willingness to supply.
A government grant for solar panel manufacturers encourages increased output.
4. Producer expectations
If producers expect future prices to rise, they may withhold supply in the short term to sell at higher prices later, reducing current supply.
If they expect prices to fall, they may sell more now, increasing current supply.
Example:
Oil companies might reduce supply today if they expect prices to rise next month.
5. Number of producers
An increase in the number of firms in a market increases overall market supply.
A decrease in the number of suppliers, due to business closures or mergers, reduces supply.
Example:
New entrants in the smartphone market increase the overall supply of phones.
6. Productivity
Productivity measures output per unit of input. Higher productivity means firms can produce more without increasing costs, shifting supply to the right.
Lower productivity reduces output per input unit and discourages supply.
Example:
Improved training leads to a more efficient workforce, raising productivity in a textile factory.
Supply curve diagrams
Diagrams are a vital tool for visualising supply changes.
Movement along the supply curve
The supply curve S remains fixed.
As price rises from P1 to P2, quantity supplied increases from Q1 to Q2.
This is shown as a movement up the supply curve, illustrating an extension of supply.
Diagram description:
X-axis: Quantity
Y-axis: Price
Point A at (Q1, P1), moving to point B at (Q2, P2) on the same curve.
Shift of the supply curve
A rightward shift from S to S1 indicates an increase in supply.
At the same price level P, quantity supplied increases from Q to Q1.
Diagram description:
Two upward-sloping supply curves: original S and new S1.
Curve S1 lies to the right of S.
If instead supply decreases, the curve shifts left from S to S2.
Real-world applications of supply concepts
Agriculture
Supply of crops is highly sensitive to weather and subsidies.
A good harvest season increases output, shifting the curve to the right.
A natural disaster, like a drought, decreases available supply.
Manufacturing
Rising costs of key inputs like steel or microchips reduce supply.
Efficiency improvements through automation increase productivity, shifting the supply curve to the right.
Service sector
Supply of services such as broadband or streaming is affected by infrastructure, government regulation, and technological development.
More providers in the market, such as new fintech firms, increases service availability.
Understanding the difference: movements vs shifts
Movements along the curve are caused by changes in the price of the product itself. All other variables are held constant.
Shifts of the curve occur when any other determinant changes – such as production costs, taxes, number of producers, or technology.
Misunderstanding this distinction is a common error. Always ask: Is the price of the good changing, or is something else changing? This will help determine whether to show a movement or a shift.
Formula for supply elasticity (preparation for later topics)
While this is covered in a separate section (1.2.5), it is useful to note the basic concept of measuring responsiveness of supply to price changes, known as price elasticity of supply (PES).
The formula is:
PES = percentage change in quantity supplied ÷ percentage change in price
This concept is relevant when examining how significant the response in supply is to a price change, especially in evaluating how time, capacity, and flexibility affect a firm’s ability to respond.
Acronym to remember supply shifters
To remember the key non-price factors that shift the supply curve, use the acronym C-T-T-E-N-P:
C – Costs of production
T – Technology
T – Taxes and subsidies
E – Expectations of future prices
N – Number of producers
P – Productivity
Each of these conditions can either increase or decrease supply depending on how they change.
FAQ
The supply curve is typically upward sloping because of the law of increasing marginal costs. As producers increase output, they often face rising costs per additional unit produced. This happens because, in the short run, some inputs like machinery or skilled labour may be limited, leading to diminishing returns. To produce more, firms may need to use less efficient inputs or pay overtime wages, which increases costs. Therefore, to justify producing and selling more units, firms require higher prices to cover these additional costs. This results in a positive relationship between price and quantity supplied. In competitive markets, firms also aim to maximise profit, and higher prices provide the incentive to expand output. Additionally, firms may prioritise sales of limited resources or products to higher-paying buyers. A flat supply curve would imply constant costs, which is unrealistic in most real-world scenarios, while a downward-sloping supply curve would contradict the principle of profit-driven supply decisions.
Yes, although rare in the real world, supply can be perfectly elastic or perfectly inelastic under specific conditions. A perfectly elastic supply means that producers are willing to supply any quantity at a specific price, but none at a lower price. This occurs when firms have unlimited capacity at a fixed cost, which is only realistic in the short run for standardised goods with large inventories and negligible production constraints. A perfectly inelastic supply, on the other hand, means that the quantity supplied is fixed, regardless of the price. This happens when there are no substitutes, no flexibility, or the good is available in a strictly limited quantity—such as tickets for a concert or land in a specific location. In such cases, price changes do not influence supply. These extremes are useful for theoretical analysis and appear in diagrams, but real-world supply is usually somewhere between these two extremes, depending on capacity, time, and flexibility.
Time is a crucial factor affecting the elasticity of supply. In the short run, many factors of production are fixed, such as machinery, factory space, or skilled labour. As a result, firms find it difficult to quickly ramp up production when prices rise. This makes supply relatively inelastic, meaning quantity supplied does not increase significantly with price. In the long run, however, all factors become variable. Firms can invest in new equipment, hire and train more workers, or even build new facilities. This greater flexibility allows a more elastic supply response—quantity supplied can increase significantly in response to price changes. For instance, a car manufacturer may be unable to produce more cars immediately when prices rise but could do so within a year by expanding operations. The time needed to plan, finance, and implement production changes plays a key role in shaping how responsive firms can be in the supply of goods and services.
Spare production capacity refers to the unused resources a firm has that could be activated without significant additional cost. When a firm has ample spare capacity, it can increase output quickly and cheaply in response to rising prices, making supply more elastic. For example, if a factory is operating at only 60% of its full potential, it can easily increase output by utilising the remaining 40% without needing to buy new machinery or hire additional staff. This responsiveness allows firms to take advantage of higher prices and improve profitability. However, when a firm is already operating at full capacity, any further increase in output would require significant investment, such as building new facilities or acquiring more inputs. This makes supply less elastic in the short term. Spare capacity also affects how firms plan for demand surges. Firms in highly competitive or seasonal markets often maintain excess capacity to quickly respond to market changes and stay ahead of rivals.
The length of a good’s production cycle significantly impacts how firms adjust supply in response to price changes. Goods with short production cycles, such as baked goods or fast fashion items, can be produced and restocked relatively quickly. This allows firms to respond more rapidly to shifts in market price, making supply more elastic. For instance, if the price of bread rises due to increased demand, bakeries can often increase production within a day or two. In contrast, goods with long production cycles, such as ships, aircraft, or property developments, take months or even years to complete. Supply for these goods is much less responsive to short-term price changes because firms cannot scale up output quickly. Decisions to increase supply involve long-term planning, investment, and regulatory approvals. This makes the supply of such goods relatively inelastic in the short run, even if prices rise significantly. Over time, however, as resources are mobilised, supply becomes more elastic.
Practice Questions
Explain, using a diagram, the difference between a movement along the supply curve and a shift of the supply curve.
A movement along the supply curve occurs when the price of the good changes, causing a change in quantity supplied, shown as movement up or down the same curve. For example, a price rise leads to an extension of supply. In contrast, a shift in the supply curve happens when a non-price factor, such as production costs or technology, changes. This results in the entire supply curve moving either right (increase) or left (decrease). Diagrams should clearly label both the original and new curves, and distinguish between movement along and shifts of the curve.
Analyse two factors that could cause the supply of mobile phones to increase.
One factor is technological improvement. Advances in production methods, such as automation, reduce costs and increase efficiency, enabling firms to supply more at each price level. This shifts the supply curve to the right. A second factor is government subsidies. If the government offers financial support to mobile phone manufacturers, production becomes cheaper and more profitable, incentivising increased supply. Both factors reduce costs and increase the quantity supplied at all prices. As a result, the supply curve shifts rightwards, leading to a potential fall in equilibrium price and an increase in equilibrium quantity.
