Topic 2.2 Notes – Supply

1. What Supply Is and the Law of Supply

Supply is the quantity of a good or service that producers are willing and able to sell at various prices during a given time period.

• Willing → depends on profit.
• Able → depends on resources, technology, and production costs.
• On the graph: Price (P) on the y-axis, Quantity (Q) on the x-axis.

The Law of Supply

The Law of Supply says:

• As price increases, quantity supplied increases.
• As price decreases, quantity supplied decreases.
• This holds ceteris paribus (holding everything else constant).

Here’s what that looks like on a standard market supply graph:

Upward-sloping market supply curve (S)

The curve labeled S slopes upward. At lower prices, firms supply smaller quantities. At higher prices, they supply larger quantities. Each point on the curve is a price-quantity pair.

Why the Curve Slopes Up

Two main reasons:

• Higher prices mean higher potential profit. Firms are more motivated to produce and sell more.
• Rising marginal cost. As firms produce additional units, costs typically rise. To cover those higher costs, they require higher prices.

You’ll connect this to marginal cost curves in later units, but even now remember: higher output usually costs more to produce at the margin.

2. Change in Quantity Supplied vs Change in Supply

This is one of the most tested distinctions on quizzes and the AP exam.

Change in Quantity Supplied

• Caused only by a change in the good’s own price.
• Shown as a movement along the supply curve.
• Price ↑ → move up the curve.
• Price ↓ → move down the curve.

The curve itself does not shift.

If the price of coffee rises from 4 dollars to 6 dollars, and producers sell more coffee, that is a movement along the curve.

Change in Supply

• Caused by something other than the good’s own price.
• Shown as a shift of the entire curve.
  • Increase in supply → shift right.
  • Decrease in supply → shift left.
• At every price, quantity supplied changes.

If you see a question that says “supply increases,” that always means the curve shifts right.

3. Determinants of Supply

These are the shifters. Know them cold.

1. Resource (Input) Costs

Examples: wages, steel, oil, rent.

• Input costs ↑ → production is less profitable → Supply decreases (left shift).
• Input costs ↓ → Supply increases (right shift).

Example: If oil prices spike, transportation and production costs rise, reducing supply for many goods.

2. Taxes and Subsidies

• Per-unit tax → raises cost of production → Supply decreases.
• Subsidy → lowers cost of production → Supply increases.

Real-world anchor: U.S. government subsidies for renewable energy have increased the supply of solar and wind power.

3. Technology and Productivity

Better technology lowers production costs.

• New machinery
• Automation
• Improved farming methods

When productivity rises, firms can produce more at every price → Supply increases.

The Industrial Revolution is a classic historical example of technology dramatically increasing supply.

4. Expectations

Producers think about the future.

• Expect higher future prices → hold inventory now → Current supply decreases.
• Expect lower future prices → sell more now → Current supply increases.

Oil markets often behave this way when producers anticipate geopolitical shocks.

5. Number of Sellers

• More firms enter → Market supply increases.
• Firms exit → Supply decreases.

Example: After cannabis legalization in several U.S. states, many new firms entered, shifting market supply right.

4. Market Supply and Why It Slopes Up

How Market Supply Is Derived

Market supply is the horizontal sum of all individual supply curves.

At each price:

• Add up how much Firm 1 supplies.
• Add how much Firm 2 supplies.
• Add all firms together.

That total is market quantity supplied.

Individual supply curves added horizontally to form market supply

Why Market Supply Slopes Up

In the figure, the left panel shows two firms’ supply curves. At a price of 3 dollars, you add the two quantities to get the total market quantity. At 5 dollars, you do the same. The right panel plots those totals and connects them to form the market supply curve.

Two forces work together:

1. Existing firms produce more as price rises (movement along their curves).
2. New firms enter when prices are high enough to earn profit.

Higher price strengthens the profit incentive. More output follows.