Supply‑Curve Shifts – Cambridge IGCSE/A‑Level Economics (9708)
1. The basic supply relationship
In the short‑run the supply curve shows the relationship between the market price of a good (P) and the quantity that producers are willing to supply (Qs), ceteris paribus (all other factors held constant). For any given price the curve tells us the quantity that will be supplied.
2. Market equilibrium – movement vs. shift
- Equilibrium: the point where quantity demanded equals quantity supplied (the intersection of the demand curve and the supply curve
). At this point the market price (P*) and quantity (Q*) are stable.
- Movement along a curve: a change in the price of the good leads to a change in the quantity supplied (or demanded) while the curve itself does not move.
- Shift of a curve: a change in any non‑price determinant moves the whole curve. The new equilibrium price and quantity are found by the intersection with the unchanged opposite curve.
Result of a supply‑curve shift (with a downward‑sloping demand curve)
| Direction of shift |
Effect on equilibrium price |
Effect on equilibrium quantity |
| Rightward (increase in supply) |
↓ |
↑ |
| Leftward (decrease in supply) |
↑ |
↓ |
3. Non‑price determinants of supply (causes of a shift)
Each of the following factors, when it changes, shifts the entire supply curve. The direction of the shift depends on whether the change makes production cheaper or more expensive, or alters producers’ willingness to sell now versus later.
- Input (factor) prices – wages, raw materials, energy, etc.
- Technology – improvements or deteriorations in production techniques.
- Expectations about future prices – producers may withhold or accelerate output.
- Number of sellers – entry of new firms or exit of existing ones.
- Taxes, subsidies and other government interventions – affect marginal cost.
- Prices of related goods in production – substitutes or complements in the production process.
- Regulatory environment – licences, environmental standards, safety regulations.
- Natural conditions – weather, disease, or other environmental factors (especially for agriculture).
- Time horizon – short‑run vs. long‑run adjustments.
4. How each determinant moves the supply curve
| Determinant |
Change in the determinant |
Direction of supply‑curve shift |
Resulting change in equilibrium (with downward‑sloping demand) |
Reasoning |
| Input prices (e.g., wages, raw‑material cost) |
Increase |
Left |
Price ↑, Quantity ↓ |
Higher marginal cost reduces quantity supplied at each price. |
| Input prices |
Decrease |
Right |
Price ↓, Quantity ↑ |
Lower marginal cost enables firms to supply more at each price. |
| Technology |
Improvement |
Right |
Price ↓, Quantity ↑ |
More efficient production lowers average cost. |
| Technology |
Deterioration |
Left |
Price ↑, Quantity ↓ |
Less efficient production raises cost. |
| Expectations of higher future price |
Anticipated rise |
Left |
Price ↑, Quantity ↓ |
Producers withhold output to sell later at the higher price. |
| Expectations of lower future price |
Anticipated fall |
Right |
Price ↓, Quantity ↑ |
Producers increase current output to avoid a later price drop. |
| Number of sellers |
More firms enter the market |
Right |
Price ↓, Quantity ↑ |
Aggregate market supply rises. |
| Number of sellers |
Firms exit the market |
Left |
Price ↑, Quantity ↓ |
Aggregate market supply falls. |
| Taxes on production |
Increase (e.g., per‑unit tax) |
Left |
Price ↑, Quantity ↓ |
Tax raises marginal cost. |
| Subsidies to producers |
Increase (e.g., per‑unit grant) |
Right |
Price ↓, Quantity ↑ |
Subsidy lowers effective marginal cost. |
| Price of related goods (production substitutes) |
Increase in the alternative’s price |
Left |
Price ↑, Quantity ↓ |
Producers switch to the higher‑priced alternative. |
| Price of related goods (production complements) |
Increase in the complement’s price |
Right |
Price ↓, Quantity ↑ |
Higher cost of the complement makes the original good cheaper to produce. |
| Regulatory changes (e.g., stricter environmental standards) |
More stringent |
Left |
Price ↑, Quantity ↓ |
Compliance raises production costs. |
| Natural conditions (e.g., favourable weather for crops) |
Favourable |
Right |
Price ↓, Quantity ↑ |
Higher yields increase supply. |
| Natural conditions (adverse – drought, disease) |
Unfavourable |
Left |
Price ↑, Quantity ↓ |
Reduced output lowers supply. |
| Time horizon |
Long‑run adjustments (e.g., plant expansion, entry of new firms) |
Right (more elastic) |
Price change smaller, quantity change larger |
All inputs become variable; supply responds more to price. |
5. Price elasticity of supply (PES) – AS Topic 2.3
- Definition: the percentage change in quantity supplied divided by the percentage change in price.
PES = %ΔQs / %ΔP
- Interpretation
- PES > 1 – supply is elastic (quantity responds strongly to price).
- PES = 1 – unit‑elastic.
- PES < 1 – supply is inelastic (quantity responds weakly).
- Factors that affect PES
- Time horizon – long‑run supply is more elastic.
- Availability of inputs – abundant, easily substitutable inputs increase elasticity.
- Storage possibilities – goods that can be stored (e.g., wheat) have more elastic supply.
- Capacity utilisation – firms operating far below capacity can increase output easily.
- Link to shifts: A more elastic supply curve means that a given shift produces a relatively small change in price and a larger change in quantity, and vice‑versa for an inelastic curve (see Section 6).
6. Consumer and producer surplus when supply shifts
Consumer surplus (CS) = area between the demand curve and the market price line. Producer surplus (PS) = area between the supply curve and the market price line.
- Rightward shift (increase in supply)
- Price falls → consumers pay less → CS expands.
- Producers receive a lower price but sell more. Whether PS rises or falls depends on the relative size of the price reduction and the quantity increase.
- Leftward shift (decrease in supply)
- Price rises → CS contracts.
- Producers receive a higher price but sell less; PS may increase or decrease for the same reason as above.
Example: A technological improvement in smartphone production shifts the supply curve right. Price falls from £600 to £500 and quantity rises from 1 million to 1.3 million units. CS expands considerably. PS falls because the £100 price loss outweighs the gain from the extra 0.3 million phones sold.
7. Short‑run vs. long‑run supply
- Short‑run supply: at least one factor (e.g., factory size) is fixed. The curve is relatively steep (inelastic). Main determinants: input‑price changes, taxes/subsidies, expectations.
- Long‑run supply: all inputs can be varied; firms can enter or exit freely. The curve is flatter (more elastic). Additional determinants become important: entry/exit, large‑scale technological change, changes in industry‑wide capacity.
8. Simple algebraic supply function
A linear supply function can be expressed as:
$$Q_s = \alpha + \beta P + \gamma X$$
- Qs = quantity supplied
- P = market price
- X = vector of non‑price determinants (e.g., input cost, technology, tax rate)
- α, β, γ = parameters (with β > 0 under normal conditions)
If any element of X changes, the term γX changes, moving the whole supply curve.
Illustration: a fall in the price of steel reduces the input‑cost component of X, making γX smaller, which raises Qs at every price – a rightward shift.
9. Suggested diagrams for exam answers
- Original supply curve S₁ and rightward shift to S₂ after a technological improvement. Show the initial equilibrium (P₁, Q₁) and the new equilibrium (P₂, Q₂) and shade the change in CS and PS.
- Leftward shift of supply (e.g., introduction of a per‑unit tax). Indicate the movement of equilibrium price and quantity and comment on surplus changes.
- Effect of elasticity: draw a steep (inelastic) and a flat (elastic) supply curve, each undergoing the same rightward shift. Compare the magnitude of price and quantity changes.
10. Key points to remember (exam checklist)
- A shift in the supply curve means that at every price a different quantity is supplied.
- Rightward shift = increase in supply → equilibrium price falls, quantity rises.
Leftward shift = decrease in supply → equilibrium price rises, quantity falls.
- All non‑price determinants must be held constant when drawing the basic supply curve.
- Price elasticity of supply determines how large the price and quantity changes will be after a shift.
- Consumer surplus always expands when price falls; producer surplus may rise or fall depending on the relative size of the price and quantity changes.
- Short‑run supply is relatively inelastic; long‑run supply is more elastic because firms can vary all inputs and new firms can enter.
- When answering a question, state:
- the specific determinant that has changed,
- the direction of the supply‑curve shift,
- the resulting change in equilibrium price and quantity, and
- the likely effect on consumer and producer surplus (and comment on PES if relevant).