Supply and the supply curve
Supply is the quantity of a good producers are willing and able to sell at a given price, in a given period. It is the mirror image of demand, with the same "willing and able" test applied to firms.
The law of supply is that as price rises, quantity supplied rises. The reason is profit. A higher price makes each unit more profitable, so existing firms produce more, and new firms are drawn into the market. So the supply curve slopes upwards from left to right, on the same axes as demand.
Individual supply is one firm's supply; market supply is every firm's supply added together at each price — the same addition as market demand.
- Supply
- the quantity of a good producers are willing and able to sell at a given price, in a given period
- Law of supply
- as price rises, quantity supplied rises
Shifts and movements
The rule is identical to demand, so it is worth stating in the same words. A change in the price of the good itself causes a movement along the supply curve. A change in anything else shifts the whole curve.
The direction is the part to be careful about, because it is the reverse of what the words suggest. A shift to the right is an increase in supply — more is supplied at every price. A shift to the left is a fall in supply.
The consequences follow from 2.4, and they are the opposite way round from demand. A rightward shift in supply lowers equilibrium price and raises equilibrium quantity — good for consumers, who pay less and buy more. A leftward shift raises price and lowers quantity — consumers pay more and get less, and producers face a decision about whether the higher price makes up for selling fewer units, which is a question about elasticity of demand.
Price elasticity of supply
Price elasticity of supply (PES) measures how much quantity supplied responds to a change in price.
PES = percentage change in quantity supplied ÷ percentage change in price
The answer is positive, because price and quantity supplied move in the same direction.
• Greater than 1 — elastic: producers can change output easily • Less than 1 — inelastic: producers cannot respond quickly
Drawn on a graph, an elastic supply curve is shallow and an inelastic one is steep — the same rule as demand.
Worked example
The price of strawberries rises by 40% in June. Growers increase the quantity supplied by 4%. Calculate PES and explain the result.
- PES = percentage change in quantity supplied ÷ percentage change in price.
- That is 4 ÷ 40 = 0.1.
- 0.1 is well below 1, so supply is highly inelastic.
- Explain why, using the factors rather than just restating the number.
- Strawberries take a season to grow, so the crop in the ground in June was planted months earlier.
- They are also perishable, so there are no stocks to release.
Answer: PES is 0.1, so supply is very inelastic. Growers cannot respond to the higher price because the crop was planted months before and takes a season to grow, and strawberries are perishable so no stocks can be released. Supply would be far more elastic over a longer period, since growers could plant a larger area next season.
Why elasticity of supply matters. For producers, elastic supply means being able to take advantage of a price rise; inelastic supply means watching a shortage push the price up without being able to sell any more. For consumers, inelastic supply means that when demand rises the price rises sharply, because output cannot expand to meet it — which is a large part of why house prices rise so fast when demand increases, since building houses takes years.
Common mistake
A tax on producers shifts supply to the left, not the right. It raises the cost of producing each unit, so less is supplied at every price — the same effect as any other cost increase.
- Price elasticity of supply
- PES: the percentage change in quantity supplied divided by the percentage change in price; the answer is positive because price and quantity supplied move in the same direction
Before you practise
- Supply is quantity producers are willing and able to sell at a given price.
- The supply curve slopes upwards because a higher price makes production more profitable.
- Market supply is every firm's supply added together at each price.
- A change in the good's own price causes a movement along the curve.
- Costs, taxes, subsidies, technology, the number of firms and the weather shift the whole curve.
- A rightward shift is an increase in supply, lowering price and raising quantity.
- PES = % change in quantity supplied ÷ % change in price, and is positive.
- Above 1 is elastic, below 1 is inelastic.
- Spare capacity, stocks and short production times make supply elastic; supply is nearly always more elastic in the long run.