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Cambridge (CIE) IGCSE Your notes

Economics
2.4 Supply
Contents
Supply, Price & Quantity
Conditions of Supply

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Supply, Price & Quantity

Your notes
Introduction to Supply
Supply is the amount of a good/service that a producer is willing and able to supply at a given price
in a given time period
A supply curve is a graphical representation of the price and quantity supplied by producers
If data were plotted, it would be an actual curve. Economists, however, use straight lines so as to
make analysis easier
The supply curve is sloping upward as there is a positive relationship between the price and quantity
supplied
Rational profit maximising producers would want to supply more as prices increase in order to
maximise their profits

Individual and market supply

Market supply is the combination of all the individual supply for a good/service
It is calculated by adding up the individual supply at each price level

The Monthly Market Supply of Bread From 4 Bakeries in a Small Town

Bakery 1 Bakery 2 Bakery 3 Bakery 4 Market Supply

300 600 180 320 1400 loaves

Individual and market supply can also be represented graphically

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Your notes

Market supply for smart phones in December is predominantly the combination of iPhone and
Samsung supply
Diagram analysis
In New York City, the market supply for smart phones in December is predominantly the combination of
iPhone and Samsung supply
At a price of $1000, the supply of iPhones is 300 units and the supply of Samsung phones is 320 units
At a price of $1,000, the market supply of smart phones in New York City during December is 620 units

Movements Along a Supply Curve

If price is the only factor that changes (ceteris paribus), there will be a change in the quantity supplied
(QS)
This change is shown by a movement along the supply curve

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A supply curve showing an extension in quantity supplied (QS) as prices increase and a contraction in
quantity supplied (QS) as prices decrease
Your notes

Diagram analysis
An increase in price from £7 to £9 leads to a movement up the supply curve from point A to B
Due to the increase in price, the quantity supplied has increased from 10 to 14 units
This movement is called an extension in QS
A decrease in price from £7 to £4 leads to a movement down the supply curve from point A to C
Due to the decrease in price, the quantity supplied has decreased from 10 to 7 units
This movement is called a contraction in QS

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Conditions of Supply
Your notes
Shifts of the Supply Curve
There are several factors that will change the supply of a good/service, irrespective of the price level.
Collectively these factors are called the conditions of supply
Changes to any of the conditions of supply shifts the entire supply curve (as opposed to a movement
along the supply curve)

A graph that shows how changes to any of the conditions of supply shifts the entire supply curve left or
right, irrespective of the price level

For example, if a firm's cost of production increases due to the increase in price of a key resource, then
there will be a decrease in supply as the firm can now only afford to produce fewer products
This is a shift in supply from S to S1. The price remains unchanged at £7 but the supply has
decreased from 10 to 2 units
How Each of the Conditions of Supply Shifts the Entire Supply Curve

Costs of Production (COP)

If the price of raw materials or other costs of production change, firms COP increases
respond by changing supply.
S decreases

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Shifting left
(S→S1) Your notes
COP decreases
S increases
Shifting
right
(S→S2)

Indirect Taxes

Any changes to indirect taxes change the cost of production for a firm Taxes increase
and impact supply.
S decreases
Shifting left
(S→S1)
Taxes decrease
S increases
Shifting
right
(S→S2)

Subsidies

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Changes to producer subsidies directly impact the cost of production Subsidy increases
for the firm.
S increases Your notes
Shifting
right
(S→S2)
Subsidy decreases
S decreases
Shifting left
(S→S1)

New Technology

New technology increases productivity and lowers costs of Technology

production. increases
Ageing technology can have the opposite effect. S increases
Shifting
right
(S→S2)
Technology
decreases
S decreases
shifting left
(S→S1)

Change in the number of firms in the industry

The entry and exit of firms into the market has a direct impact on the No. of firms
supply. increases
If ten new firms start selling building materials in Hanoi, the supply of S increases
building material will increase.
Shifting
right

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(S→S2)
No. of firms
decreases Your notes
S decreases
Shifting left
(S→S1)

Weather Events

Droughts or flooding can cause a supply shock in agricultural markets. Drought

A drought will cause supply to decrease. S decreases
Unexpectedly good growing conditions can cause supply to increase. Shifting left
(S→S1)
Good weather
S increases
Shifting
right
(S→S2)

Examiner Tips and Tricks

Several of the conditions of supply change the costs of production. However, be sure to explain
each condition as its own point before linking it to the cost of production (for example, a change in
indirect taxation).
A common error by students is to explain that a subsidy (for example, £3,000 subsidy for each
electric vehicle produced) shifts the demand curve for electric vehicles to the right. This is incorrect.
The subsidy will shift the supply curve to the right. Then due to the lower price, there will be a
movement along the demand curve (extension of quantity demanded) to create a new market
equilibrium.

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