What supply means
Supply describes how much of a good or service producers are willing and able to sell at each possible price, in a given period, with everything else held constant.
Key definitions:
- Quantity supplied: the amount producers are willing and able to sell at one particular price.
- Supply schedule: a table that lists the quantity supplied at each price.
- Supply curve: a graph of the supply schedule, with price on the vertical axis and quantity on the horizontal axis.
- Market supply: the total quantity that all producers in a market supply at each price.
- Ceteris paribus: “other things being equal”. When we draw one supply curve, we hold every influence on supply fixed except the good’s own price.
Supply is a plan, not a sale. It tells you what sellers would offer at each price. How much is actually sold depends on buyers too, which you meet in Topic 1.6.
The law of supply
The law of supply states that, other things equal, there is a positive (direct) relationship between the price of a good and the quantity supplied. When the price rises, producers offer more. When the price falls, they offer less. This is why a supply curve slopes upward from left to right.
Why do producers respond this way?
- Higher prices make extra output worth producing. Each extra unit costs something to make. A higher price means more units now bring in at least what they cost, so firms are willing to produce them.
- Extra output usually costs more per unit. To produce more, a firm must pull in resources that are less suited to the job, pay overtime or run machines harder. This is the increasing opportunity cost you met with the bowed-out production possibilities curve in Topic 1.2. Producers will only cover these rising costs if the price is higher.
- Resources move towards the more rewarding good. A higher price draws resources away from other uses, so the existing producers expand their output. (New firms joining the market is a different thing: a change in the number of sellers, which shifts the curve. See “Determinants of supply”.)
The exact cost reasoning behind a firm’s supply curve belongs to the Microeconomics course. For this course, you need to state the law, explain the positive relationship and show it on a graph.
Our fictional market: tomatoes in Valdoria
Valdoria is a fictional country. Its currency is the valda, written VD. Three greenhouse farms, A, B and C, grow tomatoes for the city market. This table shows how many kilograms each farm is willing and able to sell per day at each price:
| Price (VD per kg) | Farm A (kg per day) | Farm B (kg per day) | Farm C (kg per day) |
|---|---|---|---|
| 2 | 50 | 25 | 25 |
| 3 | 100 | 75 | 75 |
| 4 | 150 | 125 | 125 |
| 5 | 200 | 175 | 175 |
| 6 | 250 | 225 | 225 |
All figures are fictional.
Worked example 1: building and reading a market supply curve
Question. (a) Build the market supply schedule for tomatoes. (b) Check that it obeys the law of supply. (c) The market price rises from VD 3 to VD 5 per kg, and nothing else changes. Describe the change and show it on a graph.
(a) Add the quantities across at each price. Market supply is the horizontal sum: at each price, add what every farm would sell.
| Price (VD per kg) | A + B + C | Market quantity supplied (kg per day) |
|---|---|---|
| 2 | 50 + 25 + 25 | 100 |
| 3 | 100 + 75 + 75 | 250 |
| 4 | 150 + 125 + 125 | 400 |
| 5 | 200 + 175 + 175 | 550 |
| 6 | 250 + 225 + 225 | 700 |
(b) Check the law of supply. Each VD 1 rise in price raises the market quantity supplied by 150 kg per day. Price and quantity supplied rise together, so the relationship is positive and the curve will slope upward.
(c) A change in the good’s own price. At VD 3 the farms supply 250 kg per day. At VD 5 they supply 550 kg per day. Quantity supplied rises by 550 − 250 = 300 kg per day.
This is an increase in quantity supplied. On the graph it is a movement along the supply curve, from point a to point b. The curve itself does not move, because only the tomato price changed.
Check. The curve must slope upward, and price must be on the vertical axis. If your sketch slopes downward, you have drawn a demand curve.
Change in quantity supplied v. change in supply
This distinction carries marks in almost every supply question.
| Change in quantity supplied | Change in supply | |
|---|---|---|
| Caused by | A change in the good’s own price | A change in a determinant of supply (anything else) |
| On the graph | A movement along the existing curve | A shift of the whole curve |
| Wording | “Quantity supplied rises/falls” | “Supply increases/decreases” |
An increase in supply is a shift to the right: producers offer more at every price. Read it the other way and it also means they will supply the same quantity at a lower price. A decrease in supply is a shift to the left: less at every price, or the same quantity only at a higher price.
Determinants of supply
These factors shift the market supply curve. Learn the direction for each.
| Determinant | Change | Effect on supply |
|---|---|---|
| Input (resource) prices: wages, raw materials, energy, rent | Inputs become more expensive | Decreases (left) |
| Technology and productivity | Better methods or machines lower the cost per unit | Increases (right) |
| Number of sellers | More firms enter the market | Increases (right) |
| Prices of other goods the firm could produce | The price of an alternative product rises | Decreases (left): resources move to the alternative |
| Producers’ expectations | Sellers expect a higher price in the future | Current supply decreases (left), as they hold back stock to sell later |
| Taxes and subsidies on producers | A per-unit tax / a per-unit subsidy | Tax decreases (left); subsidy increases (right) |
| Government regulation | Costlier rules to follow | Decreases (left) |
The common thread is cost. Anything that raises the cost of producing each unit shifts supply left. Anything that lowers it shifts supply right. Expectations and alternative products work through what sellers give up by selling this good, now.
Things that are not determinants of supply: buyers’ incomes, tastes, the number of buyers and the prices of goods buyers see as substitutes. These shift demand (Topic 1.4).
Worked example 2: an input price rises
Question. The price of fertiliser and heating in Valdoria rises. Each farm now needs VD 1 more per kg than before to be willing to supply any given quantity. (a) Find the new market supply schedule. (b) Describe the change and show it on a graph.
(a) Each quantity on the old schedule now needs a price VD 1 higher. The quantity the farms supplied at VD 3 is now supplied only at VD 4, and so on.
| Price (VD per kg) | Old market quantity (kg per day) | New market quantity (kg per day) | Change |
|---|---|---|---|
| 3 | 250 | 100 | −150 |
| 4 | 400 | 250 | −150 |
| 5 | 550 | 400 | −150 |
| 6 | 700 | 550 | −150 |
At VD 2 the farms now supply nothing: VD 2 no longer covers the cost of growing any tomatoes.
(b) At every price the quantity supplied is lower, here by 150 kg per day. This is a decrease in supply: the curve shifts left, from S₁ to S₂. Looked at vertically, the farms now need VD 5 instead of VD 4 to supply 400 kg per day, so the new curve is also VD 1 higher.
Check. A leftward shift and an upward shift describe the same new curve. Always label which curve is the new one and show the direction with an arrow. Say “supply decreased”, not “quantity supplied decreased”.
Worked example 3: classifying events
Question. For each event, decide whether the supply of Valdorian tomatoes changes or only the quantity supplied, and state the direction.
| Event | Determinant? | Result |
|---|---|---|
| (a) A fourth farm, identical to Farm A, opens. | Number of sellers | Supply increases (right). At VD 4 the market now supplies 400 + 150 = 550 kg per day. |
| (b) A new drip-irrigation system raises the yield from each greenhouse. | Technology | Supply increases (right). |
| (c) The government pays farms VD 0.50 for each kg sold. | Subsidy | Supply increases (right). |
| (d) The price of peppers, which the same greenhouses can grow, rises sharply. | Price of an alternative product | Supply of tomatoes decreases (left). Farms switch space to peppers. |
| (e) The price of tomatoes falls from VD 5 to VD 4. | No: the good’s own price | Quantity supplied falls from 550 to 400 kg per day. A movement along S; no shift. |
| (f) Valdorian families start eating more tomatoes. | No: a change in tastes affects demand | The supply curve does not shift. If the price then rises, quantity supplied rises along S. |
Interpretation. Event (f) is the classic trap. A change on the buyers’ side never shifts supply. It may change the price, and producers respond along their existing curve.
Common misconceptions
- “The price of the good rose, so supply increased.” No. A change in the good’s own price changes the quantity supplied, a movement along the curve.
- “Supply increased, so the curve moved up.” An increase in supply is a shift to the right, which on a graph means the curve sits lower. An upward shift is a decrease.
- “Higher demand shifts supply to the right.” Demand factors never shift supply. Producers respond to the higher price along the same curve.
- “Higher input prices raise the price, so supply rises.” Higher costs decrease supply (left).
- “A tax and a subsidy shift supply the same way.” A per-unit tax on producers decreases supply; a per-unit subsidy increases it.
- Swapping the axes. Price goes on the vertical axis, quantity on the horizontal axis.
- Adding prices instead of quantities. Market supply adds the quantities at each price.
- Leaving curves unlabelled. Label both axes, label each curve (S₁, S₂) and show the shift with an arrow.
Out of scope here. Price elasticity of supply and producer surplus belong to the Microeconomics course. How supply and demand together set the price is Topic 1.6.
Where this leads
You have now met both sides of a market. In the next topic you will put demand (Topic 1.4, Demand) and supply together to find the equilibrium price and see what happens when either curve shifts: Market Equilibrium, Disequilibrium, and Changes in Equilibrium. Later, in Unit 3, the same ideas reappear in aggregate supply for the whole economy.
Try the practice questions now, then use the revision notes and the checklist to consolidate.
Quick questions
Does a rise in demand shift the supply curve?
No. Higher demand can raise the price, and producers respond by moving up along their existing supply curve. Buyers' incomes and tastes are determinants of demand, not supply.
Do I need price elasticity of supply for this course?
No. Elasticity is part of the Microeconomics course, not Macroeconomics. Here you need the law of supply, the shape of the curve and the determinants that shift it.