Supply

• Define supply and quantity supplied, and state the law of supply.
• Read a supply schedule and draw a correctly labelled supply curve from it.
• Derive market supply from the supply of individual firms.
• Explain the direction in which factor costs, related-good prices, indirect taxes, subsidies, expected prices, technology and the number of firms each move supply.
• Distinguish, in words and on a diagram, between moving along a supply curve and shifting it.

Supply is the quantity of a good or service that producers are willing and able to offer for sale at each price during a stated period, ceteris paribus. Like demand, it is a whole relationship between price and quantity. Quantity supplied is the amount producers plan to sell at one particular price: one point on that relationship.

The law of supply states that, ceteris paribus, quantity supplied rises as price rises and falls as price falls. Price and quantity supplied move in the same direction: the relationship is direct (positive). With costs and other conditions unchanged, a higher price makes producing the good more profitable. Firms already in the market have an incentive to produce and sell more, and to move resources out of other goods and into this one.

A supply schedule is a table of the quantity supplied at each of a range of prices. A supply curve plots the schedule, with price on the vertical axis and quantity on the horizontal axis. Because of the law of supply the curve slopes upward from left to right.

Each rise of $1 in the price is matched by a rise of 100 kg in the quantity supplied. Plotting the pairs gives an upward-sloping supply curve, and moving between rows is a movement along it. The schedule describes plans: what producers intend to offer at each price under stated conditions. Whether they sell all of it is settled only when supply is put together with demand.

Market supply is the total quantity that all the firms in a market offer for sale at each price. It is found by adding the quantities supplied by the individual firms at each price. As with market demand, the sum is horizontal: quantities are added at each price, and prices are never added.

At $2 the market quantity supplied is 20 + 15 + 30 = 65 loaves; at $3 it is 30 + 30 + 40 = 100 loaves. Firm B supplies nothing at $1, so at that price the market consists of A and C only. Because each firm's supply curve slopes upward, the market supply curve does too, and it lies to the right of every individual firm's curve.

The market curve changes when firms enter or leave. If a fourth bakery opens, its output is added at every price and market supply shifts to the right; if one closes, market supply shifts to the left. The number of firms is therefore itself a non-price determinant of supply.

A non-price determinant of supply is any influence on supply other than the good's own price. When one of them changes, firms offer more or less at every price and the whole supply curve shifts: to the right for an increase in supply and to the left for a decrease. Most of them work by changing the cost, and so the profitability, of producing each unit. There are six to know.

• Costs of factors of production. Wages, rents and the prices of raw materials and energy are the costs of the factors of production. If they rise, each unit costs more to make, production is less profitable at every price and firms offer less: supply shifts left. A fall in factor costs shifts supply right.
• Prices of related goods: joint supply. Goods are in joint supply when one process produces both (beef and leather; petrol and the other products refined from crude oil). If the price of beef rises, farmers raise more cattle, so more hides are produced as well: the supply of leather shifts right although its own price has not changed.
• Prices of related goods: competitive supply. Goods are in competitive supply when they compete for the same resources (wheat or barley on one field; two models on one factory line). If the price of barley rises, farmers plant more barley and less wheat, so the supply of wheat shifts left.
• Indirect taxes and subsidies. An indirect tax is paid by firms to the government on each unit sold, so it acts like a rise in costs: supply shifts left (the curve moves up by the tax per unit). A Subsidy is a payment from the government to firms for each unit produced. It acts like a fall in costs and shifts supply right (the curve moves down by the subsidy per unit).
• Future price expectations. If firms expect the price to be higher in the future, those that can store the good hold some back to sell later, so supply today falls and the curve shifts left. If they expect a lower price, they sell from stock now and supply today rises.
• Changes in technology. A better production method gives more output from the same inputs, which lowers the cost of each unit. Production is more profitable at every price, so supply shifts right.
• Number of firms. The entry of new firms adds their output at every price and shifts market supply right. The exit of firms shifts it left.

Several determinants work through cost, but each should be explained by its own chain. With invented figures: a subsidy of $2,000 per vehicle lowers the effective cost of supplying each electric vehicle by $2,000. Firms are willing to supply any given quantity at a price $2,000 lower than before, so the supply curve shifts right, or downward by $2,000. The lower market price that follows extends quantity demanded along the demand curve; demand itself has not changed.

A movement along the supply curve has only one cause: a change in the good's own price. A rise in price causes an extension of quantity supplied (a movement up the curve); a fall in price causes a contraction (a movement down the curve). Supply, the whole curve, is unchanged.

A shift of the supply curve is caused only by a change in a non-price determinant. A rightward shift is an increase in supply: more is offered at every price. A leftward shift is a decrease in supply. A tax or subsidy will go on to change the market price and quantity, but the shift of supply comes first and should be identified before that adjustment is traced.

A worked scenario with invented figures: a bakery supplies 400 loaves a day at $3 each. Flour becomes more expensive, raising the cost of every loaf, and at $3 the bakery now plans to supply only 320 loaves. The supply curve has shifted left: 80 fewer loaves are offered at the same price. If the price of bread later rises to $3.50 and the bakery supplies 360 loaves, that is an extension along the new supply curve, not a reversal of the cost shock. Supply is still lower than it was before flour became dearer.

The case shows why the direction of causation matters. Cocoa prices rose because supply had decreased; the higher price did not mean that supply had increased. Any growers who offered more beans because the price was higher were moving up along the new supply curve, an extension of quantity supplied, which is a different thing from the shift that caused the price to rise.

• Supply is the whole relationship between price and quantity; quantity supplied is one point on it.
• Law of supply: price and quantity supplied move in the same direction, ceteris paribus.
• Market supply adds the individual firms' quantities horizontally at each price.
• A change in the good's own price moves firms along the supply curve (extension or contraction). A change in a non-price determinant shifts the supply curve.
• Higher factor costs, an indirect tax or the exit of firms shift supply left; lower costs, a subsidy, better technology or the entry of firms shift it right.
• A higher price for a good in joint supply shifts this good's supply right; a higher price for a good in competitive supply shifts it left.
• An expected rise in price can lead firms to hold back stock, which reduces supply today.