Supply

Economics · The allocation of resources. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

Supply is the willingness and ability of firms to sell a product at a given price. Market supply is the total of what all the firms in the market supply at each price.

A supply curve slopes upwards from left to right. A higher price makes selling the product more profitable, so firms offer more. A change in the price of the product itself causes a movement along the curve: a rise in price causes an extension of supply and a fall in price causes a contraction.

A change in any other influence, such as costs of production, shifts the whole curve. A shift to the right is an increase in supply; a shift to the left is a decrease.

Rules to remember

Supply: the willingness and ability to sell a product at a given price
Market supply = the sum of the quantities all firms supply at each price
Price of the product rises: extension of supply (movement up along the curve). Price falls: contraction (movement down along the curve)
Supply increases (curve shifts right) with lower costs of production, better technology, a subsidy, good weather for crops or more firms in the market
Supply decreases (curve shifts left) with higher costs, an indirect tax, bad weather or natural disasters, or fewer firms
If another product that uses the same resources becomes more profitable, supply of this product decreases

Common mistake

Students shift the supply curve when the price of the product changes. A price change gives a movement along the curve; and remember that an increase in supply is a shift to the right, not upwards.

Worked example

Wages of workers in shoe factories rise. What happens to the supply curve of shoes?

Wages are a cost of production, so the cost of making each pair of shoes rises.
At every price, making shoes is now less profitable.
Firms are willing to supply fewer shoes at each price, which changes the whole curve, not one point on it.

Answer: Supply decreases: the supply curve of shoes shifts to the left.

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Cambridge Economics — Complete Theory Notes

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