Economics (9214) | Supply for goods and services

Welcome to the World of Supply!

Hello future economists! We’ve already looked at demand—what buyers want. Now, we are flipping the coin to look at the other essential side of the market: Supply.
Understanding supply is absolutely crucial because it is the meeting point of supply and demand that decides the final price of every good and service in the market. Don't worry if this chapter seems tricky at first; we will break down the graphs and concepts into easy steps!

Key Terms You Must Master in this Chapter:

• Supply
• Quantity Supplied (QS)
• The Law of Supply
• Supply Curve
• Shifts vs. Movements

1. Defining Supply and Quantity Supplied

What is Supply?

In simple terms, Supply is the amount of a good or service that producers (businesses) are willing and able to offer for sale at various possible prices over a given time period.

It's important to remember: Businesses only supply goods if they can make a profit!

Quantity Supplied (QS)

The Quantity Supplied (QS) is the specific amount producers are willing to sell at one specific price.
Example: If coffee beans are priced at $5 per bag, the Quantity Supplied might be 100 bags. If the price rises to $8, the new Quantity Supplied will be higher.

2. The Law of Supply

The Law of Supply is one of the most fundamental rules in economics. It describes the relationship between the price of a good and the quantity producers are willing to supply.

The Rule: Direct Relationship

The Law of Supply states that, holding all other factors constant (ceteris paribus), as the price of a good rises, the quantity supplied of that good rises; and as the price falls, the quantity supplied falls.

Analogy: The Baker’s Motivation
Imagine you run a bakery. If the price you can sell a loaf of bread for increases from $2 to $5, you will want to spend more time, hire more staff, and use more ingredients to bake more bread because you can make a higher profit per loaf. Your incentive to supply increases!

This relationship is called a direct or positive relationship.

3. The Supply Schedule and Supply Curve

We can represent the Law of Supply using a table (schedule) and a graph (curve).

The Supply Schedule

This is a simple table showing how much a firm is willing to supply at different prices.

Example: Bicycle Supply Schedule

| Price per Bicycle (\$) | Quantity Supplied (Units) |
|---|---|
| 100 | 50 |
| 200 | 100 |
| 300 | 150 |

The Supply Curve (S)

When you plot the data from the Supply Schedule onto a graph, you get the Supply Curve.

• Axes: Always label the vertical axis as Price (P) and the horizontal axis as Quantity (Q).
• Shape: Because of the direct relationship, the Supply Curve always slopes upwards from left to right.

Did You Know? The upward slope of the supply curve reflects increasing costs. To produce more, firms usually face higher costs (perhaps paying overtime or buying expensive raw materials), so they must receive a higher price to cover those costs and maintain profit.

4. Movements Along the Supply Curve (Change in Quantity Supplied)

When we talk about supply, we need to be very precise about what causes a change.

What causes a Movement?

A movement along the supply curve is caused only by a change in the product’s own price.

When the price changes, we move from one point on the existing curve to another point on the same curve. This is called a Change in Quantity Supplied (QS).

• If Price rises (P↑), QS rises (Movement up the curve). This is an extension of supply.
• If Price falls (P↓), QS falls (Movement down the curve). This is a contraction of supply.

Common Mistake to Avoid: Do not say "supply increased" when the price rises. Say "Quantity Supplied increased." The curve itself has not moved!

5. Shifts in the Supply Curve (Change in Supply)

A shift in the supply curve means that producers are now willing and able to supply a different quantity at the same price as before. This happens because of changes in factors other than the good's own price. These are often called the Conditions of Supply.

The Impact of Shifts

A Change in Supply causes the entire curve to shift:

• Increase in Supply: The curve shifts to the RIGHT (S to S₁). Producers supply more at every price.
• Decrease in Supply: The curve shifts to the LEFT (S to S₂). Producers supply less at every price.

Factors Causing Shifts (Conditions of Supply)

These factors determine the profitability of production, which directly influences supply.

A. Changes in Costs of Production

This includes wages, raw materials, rent, and utility bills (e.g., electricity).

• If Costs fall (e.g., electricity becomes cheaper), production is more profitable. Supply increases (shifts RIGHT).
• If Costs rise (e.g., workers demand higher wages), production is less profitable. Supply decreases (shifts LEFT).

Example: If the price of coffee beans (a raw material) rises, coffee shops will supply fewer cups of coffee at the same selling price. (Shift Left).

B. Technological Improvements

Better technology (machinery, software, etc.) makes production cheaper and more efficient.

• If Technology improves, production costs fall. Supply increases (shifts RIGHT).

C. Taxes and Subsidies

Governments often use financial tools to influence supply.

Taxes: A tax on production (like VAT or excise duty) increases the cost for the producer.

• If Taxes increase, costs rise. Supply decreases (shifts LEFT).

Subsidies: A payment from the government to producers for producing a good. This lowers the firm’s effective cost of production.

• If Subsidies increase, costs effectively fall. Supply increases (shifts RIGHT).

D. The Number of Producers/Firms

The total supply in the market is the sum of all individual firms' supply.

• If More firms enter the market (attracted by high profits), total supply increases (shifts RIGHT).
• If Firms leave the market (due to bankruptcy or low profits), total supply decreases (shifts LEFT).

E. Expectations of Future Prices

If producers expect the price of their product to rise significantly in the near future, they might hoard current stock to sell it later for a higher profit.

• If producers expect future prices to rise, current supply decreases (shifts LEFT).

6. Summary: Movement vs. Shift

This is the most crucial distinction you need for market analysis (determining price!).

| Feature | Movement Along the Curve | Shift of the Curve |
|---|---|---|
| What changes? | Quantity Supplied (QS) | Supply (S) |
| Cause? | Change in the good’s OWN PRICE only. | Change in NON-PRICE FACTORS (Costs, Tech, Taxes, etc.). |
| Curve Appearance? | Stay on the same line. | The whole line moves (Right for Increase, Left for Decrease). |

Key Takeaway:

When analyzing a market, always ask: Did the price of the good itself change? If yes, it's a movement. If no, look for a non-price factor, and the curve must shift!