Supply curves

• What is supply?

  • Supply is the amount of a good/service that a producer is willing and able to supply at a given price in a given time period
• Define and describe a supply curve.

  A supply curve is a graphical representation of the price and quantity supplied by producers.

  • The supply curve is sloping upward as there is a positive relationship between the price and quantity supplied (QS)
  • Rational profit maximising producers would want to supply more as prices increase in order to maximise their profits
• What is the law of supply?

  • The law of supply states that there is a positive (direct) relationship between quantity supplied and price, ceteris paribus
  • When the price rises, the QS rises
  • When the price falls, the QS falls
• If price is the only factor to be changed (ceteris paribus), then what happens to the supply curve?

  • If price is the only factor that changes (ceteris paribus), there will be a change in the quantity supplied (QS)
  • This change is shown by a movement along the supply curve
• What is meant by the extension and contraction of supply?

  • An increase in price movement up the supply curve from point A to B
  • Due to the increase in price, the quantity supplied has increased 
  • This movement is called an extension in QS
  • A decrease in price to a movement down the supply curve from point A to C
  • Due to the decrease in price, the quantity supplied has decreased 
  • This movement is called a contraction in QS

  
• What conditions of supply shift the entire supply curve?

  • Changes to the costs of production
  • Changes to indirect taxes and subsidies
  • Changes to technology
  • Changes to the number of firms
  • Weather events
  • Future price expectations
  • Joint goods and competitive supply
• Explain how changes in costs of production shift the supply curve.

  Changes to costs of production(COP)

  • If the price of raw materials or other costs of production change, firms respond by changing supply

  COP Increases

  S decreases, shifting left(S→S1)

  COP Decreases

  S increases, shifting right(S→S2)

  
• Explain how indirect taxes shift the supply curve.

  Indirect taxes

  • Any changes to indirect taxes change the costs of production for a firm and impact supply

  Taxes Increase

  S decreases, shifting left(S→S1)

  Taxes Decrease

   S increases, shifting right(S→S2)
• Explain how subsidies shift the supply curve.

  Subsidies

  • Changes to producer subsidies directly impact the costs of production for the firm

  Subsidy Increases

  S increases, shifting right(S→S2)

  Subsidy Decreases

   S decreases, shifting left(S→S1)
• Explain how new technology can shift the supply curve.

  New technology

  • New technology increases productivity and lowers production costs
  • Ageing technology can have the opposite effect

  Technology Increases

  S increases, shifting right(S→S2)

  Technology Decreases

  S decreases, shifting left(S→S1))
• Explain how changes in the number of firms in the industry can shift the supply curve?

  Change in the number of firms in the industry

  • The entry and exit of firms into the market have a direct impact on the supply
  • E.g. If ten new firms start selling building materials in Hanoi, the supply of building material will increase

  No. of Firms Increases

  S increases, shifting right(S→S2)

  No. of Firms Decreases

  S decreases, shifting left(S→S1)
• Explain how weather events shift the supply curve.

  Weather events

  • Droughts or flooding can cause a supply shock in agricultural markets
  • A drought will cause supply to decrease. Unexpectedly good growing conditions can cause supply to increase

  Drought

  S decreases, shifting left(S→S1)

  Good Weather

  S increases, shifting right(S→S2)
• Explain how future price expectations shift the supply curve.

  Future price expectations

  • If firms expects the price of a good/service to increase in the future, they will start supplying more
  • If firms expects the price of a good/service to decrease in the future, they will start supplying less

  Expectations price will rise

  S IncreasesShifts Right(S→S2)

  Expectations price will fall

  S DecreasesShifts Left(S→S1)
• Explain how goods in joint supply can shift the supply curve.

  Goods in joint supply

  • When there is an increase of supply of one good in joint supply (e.g. beef), possibly due to higher prices, there will be an increase in supply of the other good too (e.g. leather)

  Supply of one good rises

  S good A Increases

  Shifts Right(S→S2)

  Supply of the other good rises

  S good B IncreasesShifts Right(S→S2)
• Explain how goods in competitive supply can shift the supply curve.

  Goods in competitive supply

  • Farmers can produce many goods which are competitive in supply
  • E.g. A farmer can grow wheat or potatoes. When they increase the supply of potatoes, the supply of wheat decreases

  Supply of one good rises

  S good A Increases

  Shifts Right(S→S2)

  Supply of the other good falls

   S DecreasesShifts Left(S→S1)