1. The Theory of Market Supply
Supply is the quantity of a product that a producer is willing and able to supply / sell onto a market at a
given price in a given time period
The law of supply - a greater quantity of a good or service will be supplied at a higher price. In part this is
due to the profit incentive. For example, if you are a business extracting crude oil, you stand to make a
higher profit for every barrel supplied if the market price is $100 compared to a price of $60.
A change in market price of the product itself will cause a movement along the market supply curve
But changes in other conditions of supply (i.e. non-price factors) will bring about a shift in the supply curve.
Most of these supply conditions relate to the costs of production facing a business. But supply can also be
affected by changes in the prices of other goods and services, price expectations, shifts in technology,
supply-shocks that disrupt normal supply and also the impact of government regulations on producers.
In the exercise below identify whether the change in the market will bring about either a movement along the
supply curve or a shift in the supply curve at each price. And then decide whether you expect to see a
contraction/expansion of supply (for a movement along) or a fall/increase in supply (for a shift).
Exercise on the determinants of supply
Supply for? Change in the market Movement (i) For a (ii) For a shift
along curve movement - in supply -
OR a shift in expansion or increase or
the supply contraction? decrease?
curve?
Supply of frozen An increase in the price of
pizzas frozen pizzas due to an
increase in demand
Wheat supply Drought conditions in East
(UK) Anglia are expected to continue
through to harvest time
Christmas cards A fall in the international price of
pulp
Market supply for A rise in the price of aviation
transatlantic flights fuel
Market supply for Two airlines from Asian
transatlantic flights countries enter the market for
flights from London to New York
Market supply of Many cotton crops across Asia
clothing in retail are destroyed by floods
stores
Supply of new The local council relaxes
flats to rent in the planning laws for property
city of Oxford developers
The market supply The US government offers a
of corn in the USA subsidy of $2 per tonne for
wheat farmers who convert
their wheat into bio-fuels

2. Supply for? Change in the market Movement (i) For a (ii) For a shift
along curve movement - in supply -
OR a shift in expansion or increase or
the supply contraction? decrease?
curve?
World supply of New transitional government in
petroleum Libya announces the reopening
of Libyan refineries
Supply of workers The government increases the
to the fruit-picking minimum wage that must be
industry paid to people working in the
farming industry
Market supply of A long term rise in the market
milk in the UK price of lamb
Supply of real ale The government reduces the
tax applied to each bottle of real
ale produced in the UK
Supply of A government subsidy of £20 is
mountain bikes offered to mountain-bike
manufacturers to encourage
cycle use in towns and cities
Supply of white A rise in the world price of flour
bread
Market supply of Improvements in production
bottled water technology reduce the amount
of plastic needed for each bottle
Supply of package Expectations of a recession in
holidays to Spain the UK economy in 2012
and Italy in 2012
Supply of organic A fall in the productivity of
chocolate farmers supplying organic
chocolate
Market supply of Expectations of a rise in the
potato chips price of potatoes in world
markets
Supply of frozen The government introduces a
pizza tax on all high-fat frozen foods
of 10% (including pizza)
Market supply of The government introduces
strawberries tougher regulations on the
quality of strawberries that can
be sold in UK supermarkets