The document discusses the theory of market supply in economics. It defines supply as the quantity of a good or service producers are willing and able to provide at a given price in a given time period. The basic law of supply is that supply increases as price rises, as shown by a positively-sloped supply curve. The reasons for the upward-sloping supply curve are the profit motive, increasing production costs as output expands, and new producers entering the market at higher prices. The document provides examples and illustrations of how supply responds to changes in price and other factors.

1. Theory
of
Market
Supply
EdExcel
Economics
1.2.4

2. Market
Supply
• Supply
is
the
quan9ty
of
a
good
or
service
that
a
producer
is
willing
and
able
to
supply
onto
the
market
at
a
given
price
in
a
given
9me
period.
• The
basic
law
of
supply
is
that
as
the
price
of
a
product
rises,
so
businesses
expand
supply
to
the
market.
• A
supply
curve
shows
a
rela9onship
between
market
price
and
how
much
a
firm
is
willing
and
able
to
sell.
Mass
Produc9on
Airline
Travel
Produc9on
Lines
Key
to
understanding
the
basics
of
market
supply
is
to
be
aware
of
the
importance
of
the
profit
mo<ve.
Suppliers
will
be
looking
to
get
the
best
price
for
their
product.

3. Reasoning
for
the
Law
of
Supply
• There
are
three
main
reasons
why
supply
curves
are
drawn
as
sloping
upwards
from
leI
to
right
:
1. The
profit
mo<ve:
– If
the
market
price
rises
following
an
increase
in
demand,
it
becomes
more
profitable
for
businesses
to
increase
their
output
2. Produc<on
and
costs:
– When
output
expands,
a
firm’s
produc<on
costs
tend
to
rise,
therefore
a
higher
price
is
needed
to
cover
these
extra
costs
of
produc9on.
This
may
be
due
to
the
effects
of
diminishing
returns
as
more
factor
inputs
are
added
to
produc9on.
3. New
entrants
coming
into
the
market:
– Higher
prices
may
create
an
incen<ve
for
other
businesses
to
enter
a
market
leading
to
an
increase
in
total
supply.

4. Supply
in
Ac<on
–
Adidas
Footwear
Output
Adidas Group's footwear production worldwide from 2008 to 2014
221
171
219
239
240
256
258
0
50
100
150
200
250
300
2008
2009
2010
2011
2012
2013
2014
Million
pairs
Year
In
2009
there
was
a
global
economic
recession.
Demand
for
sports
shoes
declined
and
Adidas
responded
by
cuYng
output

5. Supply
Curve
–
Higher
Prices
and
Supply
Expansion
Price
of
Coffee
Quan9ty
supplied
Supply
of
coffee
P1
Q1
P2
Q2
P3
Q3
A
rise
in
the
market
price
brings
about
an
expansion
of
supply
–
producers
are
responding
to
the
profit
mo<ve
A
movement
along
the
supply
curve
is
caused
solely
by
a
change
in
price,
all
other
factors
remaining
constant

6. Supply
Curve
–
Lower
Prices
and
Supply
Contrac<on
Price
of
Coffee
Quan9ty
supplied
Supply
of
coffee
P1
Q1
P2
Q2
P3
Q3
If
market
prices
fall,
we
expect
to
see
a
contrac<on
of
supply
and
producers
have
less
incen9ve
to
produce
at
lower
prices
In
some
industries,
the
price
may
fall
so
low
that
some
suppliers
decide
to
leave

7. Market
Supply
Market
supply
is
total
supply
brought
to
the
market
by
producers
at
each
price.
To
calculate,
sum
the
individual
supply
schedules
Price
(£)
Firm
A’s
supply
+
Firm
B’s
supply
+
Firm
C’s
supply
+
=
Market
Supply
10
30
0
5
35
20
45
10
15
70
30
65
20
40
125
40
100
30
70
200
Supply
is
not
necessarily
the
amount
that
is
actually
sold,
since,
if
consumers
do
not
wish
to
buy
the
product,
it
will
remain
unsold

8. Causes
of
ShiXs
in
the
Market
Supply
Curve
1. Changes
in
the
unit
costs
of
produc<on
– Lower
unit
costs
mean
that
a
business
can
supply
more
at
each
price
–
for
example
higher
produc9vity
– Higher
unit
costs
cause
an
inward
shiI
of
supply
e.g.
a
rise
in
wage
rates
or
an
increase
in
energy
prices
/
other
raw
materials
2. A
fall
(deprecia<on)
in
the
exchange
rate
causes
an
increase
in
prices
of
imported
components
and
raw
materials
–
3. Advances
in
produc<on
technologies
–
outward
shiI
of
supply
4. The
entry
of
new
producers
into
the
market
–
outward
shiI
5. Favourable
weather
condi<ons
e.g.
for
agricultural
products
6. Taxes,
subsidies
and
government
regula<ons
– Indirect
taxes
cause
an
inward
shiI
of
supply
– Subsidies
cause
an
outward
shiI
of
supply
– Regula<ons
increase
costs
–
causing
an
inward
shiI
of
supply

9. Illustra<ng
An
Outward
ShiX
in
Market
Supply
Price
of
Beef
Quan9ty
supplied
S1
P1
Q1
Q2
An
outward
shiI
of
the
market
supply
for
beef
is
shown
by
S1
shiIing
to
S2.
More
can
be
supplied
at
each
price
level
S2
The
supply
curve
will
shiI
if
there
is
a
change
in
a
non-­‐
price
factor,
which
affects
producers

10. Illustra<ng
An
Inward
ShiX
in
Market
Supply
Price
of
Beef
Quan9ty
supplied
S1
P1
Q1
Q3
An
inward
shiI
of
the
market
supply
curve
means
that
producers
cannot
supply
as
much
at
each
price
level
S3
The
main
cause
of
an
inward
shiI
of
supply
will
be
an
increase
in
produc<on
costs.
How
much
the
supply
curve
shiIs
depends
on
how
important
a
par9cular
cost
is
to
a
business
e.g.
the
percentage
of
labour
costs
in
a
firm’s
total
costs.

11. Wheat
Prices
affect
Supply
Costs
in
many
Industries
Source:
DEFRA
*
data
for
May
2015
65.02
79.32
80.3
67.43
78.88
120.97
137.87
107.05
123.76
169.17
179.26
175.95
143.06
127.15
0
20
40
60
80
100
120
140
160
180
200
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015*
Price
per
tonne
in
£s
Falling
wheat
prices
will
cause
a
reduc9on
in
the
resource
costs
for
food
manufacturers
such
as
cereal
producers.
If
other
factors
remain
constant,
producers
who
use
wheat
will
see
an
outward
shiI
of
supply

12. Joint
Supply
• Joint
supply
is
where
an
increase
or
decrease
in
the
supply
of
one
good
leads
to
an
increase
or
decrease
in
supply
of
a
by-­‐product.
• Examples:
1. An
expansion
in
beef
produc9on
will
lead
to
a
rising
market
supply
of
beef
hides
2. A
contrac9on
in
the
market
supply
of
lamb
will
reduce
the
supply
of
wool
• Another
example
of
joint
supply
is
wheat
and
straw
Beef
and
hide
Lamb
and
wool
Wheat
and
straw
Codon
and
codon
seed
Examples
of
joint
supply

13. Theory
of
Market
Supply
EdExcel
Economics
1.2.4