Supply: IB Economics 2.2 study notes (HL & SL)

The law of supply

Supply is the quantity of a good that producers are willing and able to sell at each possible price over a period of time, ceteris paribus. The law of supply states that as price rises, quantity supplied rises, and as price falls, quantity supplied falls, giving the supply curve its upward slope.

The relationship is positive because a higher price makes production more profitable, which encourages existing firms to produce more and attracts new firms into the market. Higher output also usually means higher marginal costs, so firms need a higher price to justify supplying extra units.

Movements along versus shifts of the curve

A movement along a supply curve is caused only by a change in the good's own price. A rise in price causes an extension (more supplied); a fall in price causes a contraction (less supplied).

A shift of the whole supply curve is caused by a change in a non-price determinant. A rightward shift means more is supplied at every price (an increase in supply); a leftward shift means less is supplied at every price (a decrease in supply). As with demand, mixing up movements and shifts is the most common diagram error.

Non-price determinants of supply

The main non-price determinants are: costs of production (wages, raw materials, energy), technology, indirect taxes and subsidies, the prices of related goods in production, producer expectations, and the number of firms. A change in any of these shifts the whole curve.

Lower input costs or improved technology shift supply right because each unit is cheaper to make. An indirect tax raises costs and shifts supply left (up by the amount of the tax), while a subsidy shifts supply right (down by the amount of the subsidy). More firms entering the industry also shifts market supply right.

Joint supply and competitive supply

Joint supply occurs when producing one good automatically produces another. Raising beef cattle also yields hides for leather, and refining crude oil yields both petrol and bitumen. If the price of beef rises and farmers raise more cattle, the supply of hides rises too, even though the price of hides did not change.

Competitive supply occurs when goods compete for the same productive resources, so producing more of one means producing less of another. A farmer's land can grow either wheat or barley. If the wheat price rises, the farmer switches land to wheat, so the supply of barley falls. These relationships are a favourite Paper 2 data-response link.

Real-world example

An unusually good growing season shifted the supply curve for wheat to the right: favourable weather raised yields, so at every price farmers could offer more grain. That is a shift driven by a non-price determinant (growing conditions), and it tends to push the equilibrium price down.

By contrast, when strong demand pushes the market price of petrol up, firms extend supply along an unchanged supply curve to a larger quantity supplied. That is a movement, not a shift, because only petrol's own price changed. Note the contrast with a fuel or carbon tax: an indirect tax raises production costs and shifts the whole supply curve left (up by the amount of the tax), rather than moving along it.

Common Paper mistakes

Treating an indirect tax as a leftward parallel shift when the mark scheme wants a vertical shift equal to the tax at every quantity. Show the new supply curve sitting above the old one by the tax amount.

Saying a change in the good's own price shifts supply. It is always a movement along the curve.

Forgetting that a subsidy shifts supply right and downward by the per-unit subsidy, lowering the price consumers pay while raising the price producers effectively receive.

How this is examined

• Supply diagrams appear on both Paper 1 and Paper 2. Draw the curve upward-sloping with both axes and the curve labelled, and show shifts as a clearly labelled new curve (S1 to S2).
• For indirect taxes and subsidies, show the shift as a vertical distance equal to the per-unit tax or subsidy, not just a vague sideways move. The vertical gap is where marks are earned.
• Joint and competitive supply are examiner favourites in Paper 2 data response: be ready to explain how a price change in one good shifts the supply of a linked good.
• State whether a change is a movement (own price) or a shift (non-price determinant) explicitly, using the precise terms quantity supplied and supply.

Key terms

supplylaw of supplydeterminants of supplyceteris paribus