Law of Supply vs Determinants of Supply
Law of Supply and Determinants of Supply are two Supply & Demand concepts in AP Economics that students often mix up. The law of supply states that quantity supplied rises when price rises, holding all else constant. Determinants of supply are factors that shift the supply curve, changing the quantity supplied at each price. Here is how they compare side by side.
The law of supply describes the positive relationship between price and quantity supplied. When the price of a good rises, producers are willing and able to supply more of it. Conversely, when the price falls, producers are willing and able to supply less. This holds true as long as other factors like technology and input costs remain constant.
The main determinants of supply are technology, input costs, government policies, and expectations. When these factors change, the supply curve shifts to the right or left. For example, if a new technology makes production more efficient, supply will shift to the right, indicating an increase in supply at each price level.
Law of Supply vs Determinants of Supply: What Moves Sellers Along and What Moves Their Curve
| Law of Supply | Determinants of Supply | |
|---|---|---|
| Question it answers | Why the supply curve slopes upward | Why the supply curve moves position |
| Variable that changes | The good's own price | Input prices, technology, producer taxes and subsidies, number of sellers, expectations |
| What happens on the graph | A slide along one fixed curve | A new curve drawn left or right |
| Correct wording for the change | Change in quantity supplied | Change in supply |
| Meaning of a rightward move | Not applicable, since the curve stays put | Supply increases, so sellers offer more at every price |
| Effect on equilibrium | It is a response to a price already set | It resets both equilibrium price and quantity |
| Typical exam trigger phrase | The market price of the good rose | A new machine cut production costs |
Two different reasons a firm ships more units
Both ideas explain more units reaching the market, and an exam answer has to say which one applied. The law of supply covers the case where nothing about the firm changed except the price it can get. A higher price covers the rising cost of squeezing out extra units, so more units get made. A determinant covers the case where the firm's own costs or capacity changed, so it would ship more even at the price it was already receiving. Put an illustrative supply schedule at Qs equals 5P minus 20. At a price of 8 the firm offers 20 units, and at a price of 12 it offers 40 units. That extra 20 units is the law of supply, read off one unchanged curve. Now suppose a cheaper input lets the firm offer 15 more units at any price, giving Qs equals 5P minus 5. At the original price of 8 it now offers 35 units, and at 12 it offers 55 units. The two changes look identical in a sales report and are opposite on a diagram. One is a point sliding up a fixed line. The other is the line itself moving right. Try both moves at /sandbox/supply-demand.
A per unit tax shifts supply, and a price change never does
The determinants of supply are usually listed as input prices, technology, taxes and subsidies on producers, the number of sellers, and expectations about future prices. Each one changes what sellers will offer at every price, which is why each redraws the curve. A per unit excise tax collected from sellers is the cleanest case: it adds a fixed amount to the cost of every unit, so the supply curve moves up by exactly the tax, and sellers now need a price higher by that amount to offer the quantity they used to offer. Contrast that with a price ceiling, which never touches the supply curve. A ceiling holds price below equilibrium and sellers respond by sliding down their unchanged curve to a smaller quantity supplied. Writing that a ceiling decreased supply is a standard lost point, because nothing about sellers' costs or capacity changed. One trap deserves naming. Expectations pull in opposite directions on the two sides of the market. Sellers who expect a higher price next month hold stock back, so supply today falls, while buyers who expect a higher price next month buy sooner, so demand today rises. See /glossary/excise-tax for the tax case worked through.
Frequently asked questions
What is the difference between the law of supply and the determinants of supply?
The law of supply says quantity supplied rises when the good's own price rises, which is a movement along a fixed supply curve. The determinants of supply are the other factors, such as input costs and technology, whose change relocates the entire curve. One is a response to price, the other is a reason the response schedule itself changed.
Does a higher wage shift the supply curve?
Yes, a higher wage raises the cost of producing each unit, so the supply curve shifts left and sellers offer less at every price. Wages are an input price, which is one of the standard determinants of supply. The good's own price has not changed, so nothing about this is a movement along the curve.
Is a subsidy a determinant of supply?
Yes, a per unit subsidy to producers lowers the effective cost of each unit, so the supply curve shifts right by the size of the subsidy. Equilibrium price falls and equilibrium quantity rises as a result. Subsidies and producer taxes belong to the same determinant category because both change the cost of making one more unit.
Live Supply and Demand graph. Drag the curves, or open the full version.
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