IB DP Economics: Supply

This guide follows the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. It covers sub-topic 2.2 Supply of Unit 2 Microeconomics. The core of 2.2 is for SL and HL. One part is marked HL only: the assumptions behind the law of supply. Every market in this guide is invented and labelled as illustrative.

For the full course map see the IB DP Economics hub and the printable checklist. The revision notes condense this guide, and the practice set tests it. Supply meets demand in the demand, supply and market equilibrium guide. To find out what you already know, take a free 10-minute diagnostic.

What 2.2 asks you to do

Content	Skill tested	Level
Law of supply	Explain the link between price and quantity supplied	SL and HL
Assumptions behind the law	Use diminishing marginal returns and increasing marginal costs	HL only
Supply curve	Draw an upward-sloping supply curve	SL and HL
Individual and market supply	Explain how one producer’s supply relates to the market’s	SL and HL
Non-price determinants	Apply six determinants	SL and HL
Movements and shifts	Draw and distinguish both	SL and HL

The guide lists diagrams for 2.2 but no calculations. The small sums below, such as adding firms’ outputs, are there to make the ideas concrete.

The law of supply

Price is what a producer receives per unit. Quantity supplied is how much producers are willing and able to offer at a given price in a given period. The law of supply says that, with other things unchanged (ceteris paribus), a higher price leads to a larger quantity supplied, and a lower price to a smaller one.

Two reasons are usually given. A higher price makes extra output more profitable, so producers have an incentive to offer more. A higher price also lets producers cover higher costs of making each extra unit, so output that was not worth producing at a low price becomes worth producing. Both ideas are made precise by the HL assumptions below.

The supply curve

A supply curve plots price on the vertical axis against quantity supplied per period on the horizontal axis. It slopes upward from left to right.

Price
  |                        S
  |                      /
  |                    /
  |                  /
  |                /
  |              /
  |____________/________________ Quantity per period

Reading the curve: pick a price, go across to the curve, then down to the quantity. Only the good’s own price, when it changes, slides you along the curve. Everything else listed under determinants relocates the whole curve.

Individual and market supply

An individual producer’s supply shows how much one firm offers at each price. Market supply is the sum of all firms’ supplies at each price. Graphically, add the quantities sideways: at each price height, sum the distances.

Worked example (illustrative market). In the fictional country of Tarvia, three firms sell pomegranate juice. Quantities are thousands of litres per week.

Price (tarns per litre)	Arlo	Brin	Cato	Market
2	10	0	5	15
4	20	10	10	40
6	30	25	15	70
8	40	40	20	100
10	50	55	25	130

Working at a price of 6: 30 + 25 + 15 = 70. At 10: 50 + 55 + 25 = 130. Brin supplies nothing at a price of 2, perhaps because its costs are higher, yet it still counts in the market curve from a price of 4. The market curve is therefore flatter (more quantity per price rise) than any single firm’s curve, because each new firm adds to the total.

If a fourth firm, Dara, enters and supplies 0, 5, 10, 15 and 20 at the five prices, market supply becomes 15, 45, 80, 115 and 150. At a price of 6 the market now supplies 70 + 10 = 80. That is a shift, not a movement, because nothing about the good’s own price changed.

HL only: assumptions underlying the law of supply

The guide names two assumptions. Both concern what happens to the cost of making each extra unit.

Law of diminishing marginal returns. Over a period short enough that some input cannot be changed, such as a workshop or a machine, the producer is limited. As you add more of a variable factor, such as workers, the extra output from each additional unit of it eventually falls. The wage stays the same while output per extra worker shrinks, so the cost of each extra unit of output rises.

Increasing marginal costs. Marginal cost means the extra cost of making one further unit. If it rises with output, a producer will only expand output if the price rises enough to cover it. This is why the supply curve slopes upward: the price must be high enough to cover the marginal cost of the last unit supplied.

Worked example (HL only; illustrative bakery). A bakery has one oven and pays each worker 120 tarns per day. Each extra worker adds the following loaves.

Workers	Extra loaves (marginal product)	Total loaves	Marginal cost per loaf (120 ÷ marginal product)
1	24	24	120 ÷ 24 = 5
2	20	44	120 ÷ 20 = 6
3	15	59	120 ÷ 15 = 8
4	12	71	120 ÷ 12 = 10
5	8	79	120 ÷ 8 = 15
6	6	85	120 ÷ 6 = 20

Marginal product falls from the second worker, so diminishing marginal returns set in there. Marginal cost rises from 5 to 20. A bakery that only produces a loaf when the price at least covers its marginal cost supplies 44 loaves at a price of 6, 59 at 8, 71 at 10, 79 at 15 and 85 at 20. Price and quantity supplied rise together, which traces an upward-sloping supply curve.

Note what the example does not claim. It does not show that every firm faces these figures, only why a rising marginal cost gives the law of supply a reason.

Non-price determinants of supply

The guide lists six. Each changes the quantity producers will offer at every price, so each shifts the curve.

1. Changes in costs of factors of production (FOPs). Higher wages, rents, raw material prices or energy prices raise the cost of production, so supply falls (shifts left). Lower costs shift supply right.
2. Prices of related goods. Two cases appear in the guide.
   • Competitive supply: goods that use the same resources. If the price of oats rises, a farmer moves land from wheat to oats, so the supply of wheat falls.
   • Joint supply: goods produced together. If the price of lamb rises, farmers rear more sheep, and the supply of wool, a by-product, rises.
3. Indirect taxes and subsidies. An indirect tax is a cost added to each unit sold, so supply falls. A subsidy lowers the producer’s cost per unit, so supply rises.
4. Future price expectations. If producers of a storable good expect a higher price next month, they may hold back stock today, so current supply falls. If they expect a lower price, they may sell more now.
5. Changes in technology. Better methods lower the cost per unit, so supply rises.
6. Number of firms. More firms in the market means more supply at each price. Exit has the opposite effect.

Taxes and subsidies on the diagram. Take the Tarvia market with a per-unit tax of 2 tarns. A producer who needed 6 tarns to supply 70 must now receive 8 from the buyer, because 2 goes to the government. So 70 is now supplied at a price of 8, 100 at 10, and 40 at 6. The curve shifts upward by the amount of the tax. A subsidy of 2 does the reverse: 100 is now supplied at a price of 6, 130 at 8, and 70 at 4, a shift downward by 2.

Price	Original	With tax of 2	With subsidy of 2
4	40	15	70
6	70	40	100
8	100	70	130

Movements along and shifts of the supply curve

This is the distinction most often confused.

• A movement along the curve happens when the good’s own price alone changes. It is called an expansion of supply for a price rise and a contraction for a price fall, though “change in quantity supplied” is the safest wording.
• A shift of the curve is caused by any non-price determinant. A rightward shift is an increase in supply. A leftward shift is a decrease in supply.

How to draw each:

Movement along S             Shift of S (S1 to S2 decrease, S1 to S3 increase)
Price                        Price
  |           S                 |    S2    S1    S3
  |         /                   |    /    /    /
  |       / B   price up        |   /    /    /
  |     / A     A to B          |  /    /    /
  |___/_________ Q              |_/____/____/____ Q

Label both axes, label the curve S (and S1, S2 after a shift), and mark the old and new quantities. State the cause in words: “an increase in wages shifts S1 to S2, a decrease in supply”.

Worked example. Pomegranate juice rises in price from 6 to 8 tarns. Quantity supplied moves from 70 to 100: a movement along S. Then pomegranate growers face higher wage costs and each of the three firms supplies 10 fewer litres at each price. At 8 tarns, the market supplies 100 - 30 = 70. That is a shift left, a decrease in supply, and the curve now sits above the old one.

Common errors

• Writing that a price change “shifts” the supply curve. A change in the good’s own price is a movement.
• Drawing the tax shift as a movement along the curve. A tax shifts the curve.
• Forgetting ceteris paribus when stating the law of supply.
• In HL answers, naming diminishing returns but not linking it to rising marginal cost and then to the upward slope.
• Treating joint supply and competitive supply as the same. In joint supply the goods rise together; in competitive supply they pull resources apart.
• Describing a shift “to the right” without saying whether supply rose or fell, or which determinant caused it.
• Labelling the vertical axis “quantity”.

Command terms to expect

The guide groups command terms by objective. Define and outline ask for knowledge. Explain and distinguish ask for reasons and clear differences. Draw and label mean an accurate, labelled diagram. If a question says calculate, show the working. The practice set trains each. Start with the practice questions once you are comfortable with the diagrams, or reread the revision notes first.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published by the International Baccalaureate Organization (February 2020). Sub-topic 2.2 Supply.