Supply and the supply curve
- Supply is the quantity producers are willing and able to sell at each price, over a period of time.
- As price rises, quantity supplied rises, because higher prices make production more profitable. So the supply curve slopes upwards from left to right.
- A change in the good's own price causes a movement along the supply curve: an extension or a contraction of supply.
Shifts in supply
- Other factors shift the supply curve: right for an increase in supply, left for a decrease.
- Costs of production: higher costs (such as wages or raw materials) shift supply left.
- Technology: better technology lowers costs and shifts supply right.
- Taxes shift supply left; subsidies (government payments to producers) shift it right.
- Weather and natural events affect supply, especially of farm produce and fish.
- The number of firms in the market.
Reading supply diagrams
- Draw price on the vertical axis and quantity on the horizontal axis. Label the curve S.
- For an increase in supply, draw a new curve S1 to the right of S. For a decrease, draw S1 to the left.
- Example: if a new machine lets a bakery make bread more cheaply, the bakery will supply more loaves at every price, so supply shifts right.
Key terms
- Supply
- The quantity producers are willing and able to sell at each price.
- Supply curve
- A graph showing quantity supplied at each price.
- Extension of supply
- More being supplied because the price rises.
- Subsidy
- A payment from the government to producers to lower costs.
- Costs of production
- The costs of making goods, such as wages and materials.
- Indirect tax
- A tax on spending, which raises firms' costs.