Supply content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class. Subtopics: Intro to Supply The Supply Curve Why is the Supply Curve Upward Sloping? Determinants of Supply Joint Supply

1. Supply
Lower 6th Micro
How Markets Work

2. Intro to
Supply
Supply
Mr O’Grady

3. Supply
Definition: The quantity of a g/s which a producer is willing and able to produce and sell at a
given price
Market supply: the sum of all producers’ individual supply
The law of supply: as the selling price of a product
increases (↑), quantity supplied increase too(↑);
conversely, as the price of a good decreases (↓), quantity
supplied decreases too(↓)
The Supply Curve: a graph depicting the relationship
between the price of a certain commodity (the y-axis) and
the quantity of that commodity that is supplied at that
price (the x-axis)
Supply curves are upward sloping due to the law of supply
S
Quantity
Price

4. The Supply
Curve
Supply
Mr O’Grady

5. The Supply Curve
The Supply Curve: a graph depicting the relationship
between the price of a certain commodity (the y-axis) and
the quantity of that commodity that is supplied at that
price (the x-axis)
Supply curves are upward sloping due to the law of supply
The law of supply: as the selling price of a product increases (↑),
quantity supplied increase too(↑); conversely, as the price of a
good decreases (↓), quantity supplied decreases too(↓)
Supply as a function: Quantity supplied can be thought of
as a function of price, as well as several other factors
Qs = f(P, K1, K2, …)
The supply curve is a graphical representation of this function
Changes in Price: correspond to movements along the supply curve.
Every point on the price axis corresponds to a given point on the quantity axis
Changes to any other determining factor: correspond to a shift of the supply curve
If another factor changes, the quantity supply at all given prices will change, the only way to show this is by
moving the curve
E.g. when the harvest of strawberries fails, firms will make less strawberry ice cream at each price
S
Quantity
Price

6. Why is the
Supply Curve
Upward Sloping?
Supply
Mr O’Grady

7. Why is the Supply Curve Upward Sloping?
Key Question: Why do firms sell more at higher prices, less at lower prices (the law
of supply)?
The profit motive: When the market price rises following an increase in demand, it
becomes more profitable for businesses to increase their output
Production and costs: When output expands, a firm's production costs tend to
rise, therefore a higher price is needed to cover these extra costs of production.
This may be due to the effects of diminishing returns as more factor inputs are added to
production.
New entrants coming into the market: Higher
prices may create an incentive for other businesses
to enter the market leading to an increase in total
supply.
S
Quantity
Price

8. Determinants of
Supply
Supply
Mr O’Grady

9. Determinants of Supply
Recap: Supply/the supply curve can be thought of as a function.
Quantity supplied is a function of price, as well as several other factors
Qs = f(P, K1, K2, …)
Question: What are these factors?
1. The price of the good (p)
If the price of an ordinary G/S increases, supply for that product will increase too
If the price of an ordinary G/S decreases, supply for that product will decrease too
2. Costs of production
Costs of production: the costs associated with making output, mainly made up of the costs of
hiring and using the necessary factors of production (C.E.L.L.)
If the factor input prices increase, a greater price of the final product is required for firms to
maintain their profit for each unit. The firm has passed on some of the increased costs to
consumers
This means that a lower quantity is supplied at any given price
A fall in supply - an inward shift
E.g. if a firm has to pay its worker’s higher wages, the firm won’t be able to produce as much
for the same price

10. 3. Level of Technology
Improvements in technology means that we can get more output from a given amount of
inputs
This means that the production costs for each unit will fall
Firms will produce more for a given price as more units now become profitable to make
An increase in supply – an outward shift
4. Government Policy (taxes and subsidies and regulations)
Indirect taxes: government imposed levies on the sale of an item that entitle the government
to a proportion of the sales price
They artificially increase production costs, decreasing supply - an inward shift.
E.g. Cigarettes and Alcohol are highly taxed to make them more expensive and reduce the amount
consumed
Subsidies: sums of money granted by the state or a public body to help an industry or
business keep the price of a commodity or service low
They artificially bring about a fall in cost of production, as they cover part of the firms supply costs,
increasing supply - an outward shift
E.g. Farmers are subsidised so as to ensure sufficient food is available and affordable for UK citizens
Regulations: a set of rules, normally imposed by government, that seeks to modify or
determine the behaviour of firms.
They increase production costs as it can be expensive for firms to meet more standards, decreasing supply -
an inward shift
E.g. Increased health and safety regulations mean firms must spend more on PPE

11. 5. Prices of Substitutes in production
Substitute in production: a product that could have been supplied using the same resources.
A rise in the price of a substitute in production might lead some producers to switch to
producing the substitute product
E.g. If coffee farmers see cocoa prices rise, this may cause some farmers to switch from
coffee to cocoa
Less coffee is produced at each given price meaning a decrease in supply – an inward shift
6. The entry of new producers into the market
With more producers, there will be more people who can produce output and more people
willing to sell for a given price
An increase in supply – an outward shift
(arguably though, the number of producers would only increase as a result of changes to one of the other
factors leading to an attractive new price)
7. Shocks to factors of production
If there is a marked reduction in the quantity of a factor of production, there will be fewer
available resources
With less inputs, firms will have to cut the quantity they produce at each given price level
A decrease in supply - an inward shift
E.g. If an earthquake destroys all the sewing machines in a garment factory, that firm can no
longer make clothes, meaning fewer clothes can be produced at any given price

12. 8) Other factors
A variety of other factors will have an impact on the quantity supply of a good or service
including:
Expectations
Population changes
Etc.
Full Supply function: Qs = f(price of the good, costs of production, level of
technology, government policies, prices of substitutes in production, no. of
firms in the market, stock of factor of production, …)

13. Joint Supply
Supply +
Mr O’Grady

14. Joint Supply
Definition: when two goods are produced together from the same origin / raw
material.
A change in the level of production of one good, effects the supply of the other
Analysis: Joint supply usually arises because producing a good, creates a by-
product.
E.g. Increasing the quantity of beef will mean more cows have to be killed. This will mean
that more cow hides can be produced as a by-product, and the supply of hides increases.
D
S0 S1
Quantity
Price
Beef
P0
Q0
P1
Q1
D0
D1S0
Quantity
Price
Hides
P0
Q0
P1
Q1

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