Supply (Years 8–11) — Economics

The law of supply, why the supply curve slopes up, and the factors that shift supply.

Supply is the quantity of a good or service that producers are willing and able to sell at each price over a period of time. It looks at the market from the seller's side rather than the buyer's.

Why this matters Prices are set by both sides of a market. If you only understand demand you see half the picture. Supply explains why a good harvest lowers food prices and why costs of production feed through to the shops.

The law of supply

The law of supply states that, ceteris paribus, as the price of a good rises the quantity supplied rises, and as the price falls the quantity supplied falls. There is a direct (positive) relationship between price and quantity supplied.

Why the supply curve slopes up

On the same axes (price vertical, quantity horizontal) the supply curve slopes upwards from left to right. The reasons are:

A higher price makes selling more profitable, so existing firms produce more.
A higher price can cover the higher costs of expanding output.
Higher prices attract new firms into the market over time.

A new tax raises firms' costs, shifting the whole supply curve left, from S1 to S2 - at every price, less is now supplied.

Movements along versus shifts

A change in the good's own price causes a movement along the supply curve (an extension when price rises, a contraction when price falls). A change in any other condition shifts the whole curve.

Common exam mistake: confusing a subsidy with a tax. A subsidy lowers a firm's costs and shifts supply right; a tax raises costs and shifts supply left. Mixing these two up is one of the most common errors in supply questions.

Factor changes	Effect on supply
Costs of production fall	Shifts right (more supply)
New, better technology	Shifts right
A tax on the product	Shifts left
A subsidy to producers	Shifts right

Key shift factors

The main factors that shift supply are: the costs of production (wages, raw materials, energy), technology, indirect taxes and subsidies, and, for farm goods, weather. For example, a good olive harvest shifts the supply of olive oil to the right, tending to lower its price, while a new tax on it would shift supply to the left. A subsidy has the opposite effect to a tax: it lowers the cost the firm bears, so supply shifts right.

It is useful to keep demand and supply separate in your mind. When answering a question, first ask: has the good's own price changed, or has something else changed? If it is the own price, describe a movement along the curve. If it is anything else, describe a shift. Getting this distinction right is one of the most common ways to score marks in the IGCSE examination, and it prepares you for the next chapter, where demand and supply are brought together to find the market price.

Exam technique: always state the direction of a supply shift in terms of cost - if a change raises firms' costs, supply shifts left; if it lowers costs, supply shifts right. Framing your answer this way makes your chain of reasoning explicit and picks up extra marks.

Put these steps in order to show how a new tax on a good affects its market:

Government imposes a tax on the good
The tax raises firms' costs
Supply curve shifts left
At the old price there is now excess demand
Price rises to a new, higher equilibrium and quantity traded falls