Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.
Recap
- Supply = the quantities sellers are willing and able to offer at each price in a period, other things equal.
- Law of supply: own price up → quantity supplied up (and the reverse). The supply curve slopes upward.
- Why it slopes up: marginal cost rises as output rises (resources are not equally suited), so sellers produce extra units only if the price covers their higher cost. A higher price is a profit incentive.
- A seller produces each unit while price ≥ marginal cost. The height of the supply curve at a quantity is the MC of the last unit.
- Sellers respond to incentives (prices, taxes, subsidies) and to technology.
Key relationships
| Relationship | How to use it |
|---|---|
| Produce each unit while price ≥ MC | Builds an individual supply schedule from MC values |
| Market Qs at price P = sum of every seller’s Qs at P | Add across each row; on a graph, add horizontally |
| Own price change | Movement along S: “quantity supplied rises/falls” |
| Determinant change | Shift of S: “supply increases (right, down) / decreases (left, up)” |
| Determinant | Change | Effect on supply |
|---|---|---|
| Input prices (wages, materials, energy) | rise | decreases (left) |
| Technology / productivity | improves | increases (right) |
| Price of another good the seller could make | rises | decreases (left) |
| Per-unit tax on sellers | introduced or raised | decreases (left) |
| Per-unit subsidy | introduced or raised | increases (right) |
| Number of sellers | rises | increases (right) |
| Expected future price (storable good) | rises | decreases now (left) |
| Natural conditions | bad harvest, disaster | decreases (left) |
Assumptions
- Other things equal (ceteris paribus): only the variable being studied changes.
- Supply is measured over a stated period.
- Price is on the vertical axis; quantity on the horizontal axis.
Mistakes to avoid
- Saying “supply rises” when only the good’s own price rose. Say “quantity supplied rises”.
- Drawing a decrease in supply as a shift down. It is a shift left (up).
- Explaining the upward slope with buyers’ behaviour. The reason is sellers’ rising marginal cost.
- Putting a tax on sellers on the demand side.
- Treating a change in demand as a change in supply.
- Unlabelled graphs: label both axes with units and label the curves (S₁, S₂).
Quick self-check
- Two sellers supply 10 and 25 units at $3, 20 and 35 at $4, 30 and 45 at $5. What is market quantity supplied at each price? (35, 55 and 75 units)
- A firm’s marginal cost of its 1st to 4th units is $6, $9, $12 and $16. How many units does it supply at $12? (3: each unit with MC ≤ $12)
- Workers’ wages in an industry rise. Shift or movement? (Supply decreases: shift left.)
- Why can a rise in the price of wheat reduce the supply of barley? (Farmers switch land and labour to the more profitable crop.)
Next: practice questions.