Causes of decreases and increases in supply

Published by Patrick Mutisya · 14 days ago

IGCSE Economics 0455 – Allocation of Resources: Supply

Allocation of Resources – Supply

Objective

To understand the causes of decreases and increases in supply and how they are represented in the supply curve.

1. The Law of Supply

The law of supply states that, ceteris paribus, the quantity supplied of a good rises when its price rises and falls when its price falls.

Mathematically, this relationship can be expressed as:

\$Qs = f(P) \quad \text{with} \quad \frac{dQs}{dP} > 0\$

where \$Q_s\$ is the quantity supplied and \$P\$ is the market price.

2. Movement Along vs. Shift of the Supply Curve

  • Movement along the supply curve: Caused by a change in the price of the good itself.

  • Shift of the supply curve: Caused by changes in any other factor that affects producers’ willingness or ability to supply at each price.

3. Factors that Increase Supply (Right‑Hand Shift)

  1. Improvement in technology – reduces production costs.

  2. Decrease in input prices – e.g., cheaper raw materials or wages.

  3. Increase in the number of sellers – more firms enter the market.

  4. Expectations of lower future prices – producers sell more now.

  5. Government subsidies – lower effective cost of production.

  6. Favorable weather conditions (for agricultural products).

4. Factors that Decrease Supply (Left‑Hand Shift)

  1. Technological setbacks – higher production costs.

  2. Increase in input prices – e.g., rise in wages or raw material costs.

  3. Decrease in the number of sellers – firms exit the market.

  4. Expectations of higher future prices – producers hold back output.

  5. Government taxes or removal of subsidies – increase cost of production.

  6. Adverse weather conditions (for agricultural products).

5. Summary Table of Supply Shifters

FactorEffect on SupplyDirection of Curve ShiftTypical Example (IGCSE Context)
Technological improvementIncreaseRightIntroduction of assembly‑line production in a car factory.
Rise in input pricesDecreaseLeftHigher steel prices for bicycle manufacturers.
Number of sellersIncrease or decreaseRight (more sellers) / Left (fewer sellers)New coffee shop opens in town / Existing shop closes.
Government subsidyIncreaseRightSubsidy for solar panel producers.
Tax on productionDecreaseLeftExcise duty on cigarettes.
Expectations of future priceIncrease (if expect lower future price) / Decrease (if expect higher future price)Right / LeftFarmers sell wheat now expecting a price drop next season.

6. Diagrammatic Representation

Suggested diagram: Two supply curves (S₁ and S₂). S₂ is to the right of S₁ indicating an increase in supply; label the shift and note the cause (e.g., technological improvement). A separate diagram could show S₁ shifting left to S₃ to illustrate a decrease in supply (e.g., rise in input prices).

7. Quick Revision Questions

  1. Explain why a fall in the price of labour would cause a right‑hand shift of the supply curve for a manufacturing firm.

  2. Identify two factors that would shift the supply curve of wheat to the left and explain the likely impact on market equilibrium price and quantity.

  3. How does a government subsidy differ from a tax in terms of its effect on the supply curve?