Determinants of Supply (Cambridge AS & A Level – 9708)
In the supply model the quantity supplied at any given price is influenced by a number of non‑price factors. A change in any of these factors shifts the whole supply curve:
- Right‑hand shift = increase in supply (more is supplied at every price).
- Left‑hand shift = decrease in supply (less is supplied at every price).
1. Price Elasticity of Supply (PES)
Definition: PES measures the responsiveness of quantity supplied to a change in the product’s own price.
Percentage‑change formula
\[
E_s \;=\; \frac{\%\Delta Q_s}{\%\Delta P}
\]
Δ‑form (used in exam calculations)
\[
E_s \;=\; \frac{\Delta Q_s / Q_s}{\Delta P / P}
\]
1.1 Worked example
| Scenario |
P₁ |
P₂ |
Q₁ |
Q₂ |
ΔP % |
ΔQₛ % |
PES (Eₛ) |
| Price rises from £10 to £12; quantity supplied rises from 200 to 240. |
10 |
12 |
200 |
240 |
+20 % |
+20 % |
1.0 (unit‑elastic) |
| Price falls from £8 to £6; quantity supplied falls from 150 to 120. |
8 |
6 |
150 |
120 |
‑25 % |
‑20 % |
0.8 (inelastic) |
1.2 Interpreting the coefficient
- |Eₛ| > 1 – supply is elastic; quantity supplied changes proportionally more than price.
- |Eₛ| = 1 – supply is unit‑elastic.
- |Eₛ| < 1 – supply is inelastic; quantity supplied is relatively insensitive to price.
- Eₛ = 0 – perfectly inelastic (fixed quantity, e.g., a unique artwork).
- Eₛ → ∞ – perfectly elastic (producers will supply any amount at a given price, typical of a perfectly competitive market with excess capacity).
1.3 Why PES matters for the syllabus
- It determines the magnitude of the change in producer surplus when price moves.
- It influences the incidence of taxes and subsidies – the more elastic the supply, the larger the burden on producers.
- It helps predict the speed of market adjustment after a shock (e.g., natural disaster, policy change).
2. Core Determinants of Supply (Cambridge Syllabus)
- Input (factor) prices – cost of raw materials, labour, energy, etc.
- Technology – innovations that reduce the cost of production or increase output per unit input.
- Expectations of future prices – producers’ forecasts about where the market price will be.
- Number of sellers – entry of new firms or exit of existing ones.
- Taxes and subsidies – per‑unit taxes, licences, or government payments.
- Prices of related goods (production substitutes & complements) – e.g., corn vs. wheat.
- Government regulations – licences, quotas, health & safety or environmental standards.
- Natural conditions – weather, disease, seasonal cycles (mainly for agricultural products).
3. Effect of Each Determinant on the Supply Curve
| Determinant |
Direction of shift |
Reasoning (example) |
| Input prices |
Higher → left; Lower → right |
Rise in steel price makes car production more costly, so fewer cars are supplied at each price. |
| Technology |
Improvement → right; Regression → left |
Automated looms cut labour per shirt, allowing more shirts to be produced at the same cost. |
| Expectations of future prices |
Higher expected future price → left (producers hold back); Lower expected future price → right |
Farmers store wheat when they expect a price rise next season, reducing current market supply. |
| Number of sellers |
More firms → right; Fewer firms → left |
A new bakery enters the market, increasing total bread supply. |
| Taxes (per‑unit) |
Higher tax → left; Tax cut → right |
A £0.50 excise tax on cigarettes raises marginal cost, reducing quantity supplied. |
| Subsidies (per‑unit) |
Grant → right; Removal → left |
Government pays £0.30 per litre of bio‑fuel, encouraging firms to expand output. |
| Prices of related goods (production substitutes) |
Higher price of alternative → right for original; Lower price → left |
If soybeans become more profitable, farmers shift land from wheat to soy, lowering wheat supply. |
| Government regulations |
Stricter → left; Deregulation → right |
New emissions standards raise steel‑plant costs, reducing steel supply. |
| Natural conditions |
Favourable → right; Adverse → left |
A drought cuts the rice harvest, shifting the rice supply curve leftward. |
4. Supply‑function notation (Cambridge style)
The market‑wide supply relationship can be written as a multivariate function:
\[
Q_s \;=\; f\big(P,\;P_{inputs},\;T,\;E,\;N,\;R,\;G\big)
\]
- Qₛ – quantity supplied.
- P – own‑price of the product.
- Pinputs – vector of input (factor) prices.
- T – level of technology.
- E – expectations of future prices.
- N – number of sellers.
- R – prices of related goods (production substitutes/complements).
- G – government policy variables (taxes, subsidies, regulations).
5. Diagramming Supply Shifts – exam tip
When a question asks you to illustrate a change:
- Draw price (vertical) against quantity (horizontal).
- Label the original curve S₁ and the new curve S₂.
- Use a clear arrow to show the direction of the shift and write the determinant beside it (e.g., “technological improvement”).
- Mark the original equilibrium (P₁, Q₁) and the new equilibrium (P₂, Q₂).
- Under the diagram, write a concise paragraph: state the determinant, describe the shift, and explain the resulting change in equilibrium price and quantity.
6. Key Take‑aways
- Any factor that changes production cost or the profitability of supplying a good shifts the entire supply curve.
- Rightward shift = increase in supply; leftward shift = decrease in supply.
- Price elasticity of supply quantifies how sensitive quantity supplied is to price changes – essential for analysing tax incidence, subsidy impact and adjustment speed.
- For exam success you must be able to:
- Identify the relevant determinant from a real‑world scenario.
- State the direction of the shift and give a brief economic rationale.
- Calculate and interpret PES using the percentage‑change formula.
- Draw a clear, correctly labelled supply‑shift diagram.