TheIBAxolotl
The law of supply
Supply is the quantity of a good producers are willing and able to offer for sale at each possible price over a period of time. The law of supply says that, ceteris paribus, a higher price leads to a higher quantity supplied. Higher prices make production more profitable and allow firms to cover the higher costs of extra output.
Diagram in words: price on the vertical axis, quantity on the horizontal. The supply curve (S) slopes upward from left to right. A change in the good's own price causes a movement along it. Market supply is the horizontal sum of every firm's supply.
Movements versus shifts
- Own price change: movement along S (extension or contraction of quantity supplied).
- Non-price change: the whole curve shifts. A shift right (or down) means more is offered at every price, or the same amount at a lower price.
Non-price determinants
- Costs of factors of production such as wages, raw materials and energy: higher costs shift supply left.
- Technology: better methods lower unit costs and shift supply right.
- Prices of related goods in production: if a farmer can grow wheat or barley, a higher price for barley pulls land away from wheat, shifting wheat supply left (competitive supply). Goods produced together, like beef and leather, are in joint supply.
- Expectations about future prices: if prices are expected to rise, firms may hold stock back now.
- Government: indirect taxes shift supply left; subsidies shift it right (see 2.7).
- Number of firms in the market.
- Shocks such as weather, disease or war, important for agricultural goods.
(HL) Diminishing marginal returns
In the short run at least one factor (usually capital, such as a factory) is fixed. If a firm keeps adding a variable factor such as labour, output first rises quickly, but eventually each extra worker adds less output than the previous one, because workers share the same fixed equipment. This is the law of diminishing marginal returns.
(HL) Rising marginal cost and the supply curve
If each extra worker costs the same wage but adds less output, the cost of producing one extra unit, the marginal cost (MC), rises. A firm will only supply additional units if the price covers this rising MC, so the supply curve slopes upward. In fact the firm's supply curve follows its rising MC curve.
Worked example (HL): a bakery pays USD 60 per worker per day.
| Workers | Total output (loaves) | Marginal product | MC per loaf (USD) |
|---|---|---|---|
| 1 | 10 | 10 | 60 ÷ 10 = 6.00 |
| 2 | 24 | 14 | 60 ÷ 14 ≈ 4.29 |
| 3 | 34 | 10 | 60 ÷ 10 = 6.00 |
| 4 | 40 | 6 | 60 ÷ 6 = 10.00 |
After the second worker, marginal product falls and MC rises, so a higher price is needed to make extra loaves worthwhile.
Linear supply (HL): \(Q_s = c + dP\). Example: \(Q_s = -15 + 5P\). At P = 10, \(Q_s = 35\). Supply begins at P = 3 (where \(Q_s = 0\)). If costs rise so that 10 fewer units are supplied at every price, the new function is \(Q_s = -25 + 5P\), a parallel shift left.
Common mistakes
- Shifting supply when the good's own price changes.
- Saying a cost increase "shifts supply up so supply increases". An upward (leftward) shift is a decrease in supply.
- Confusing diminishing marginal returns (short run, one fixed factor) with diseconomies of scale (long run, all factors variable).
Exam tips
- 10-mark questions: define supply, draw S1 and S2 with arrows and new equilibrium, and explain the specific determinant in context (for example, a frost destroying crops).
- 15-mark questions: combine supply shifts with elasticity and stakeholder effects. Ask who gains and who loses and whether the effect is short-term.
- HL: be ready to link the law of diminishing marginal returns to MC in a short chain of reasoning: fixed factor → falling marginal product → rising MC → upward-sloping supply.