Individual supply is the quantity of a good or service that a single producer is willing and able to sell at each possible price during a given period, ceteris paribus (all other factors remaining constant).
Market supply is the horizontal summation of the individual supply schedules of all producers in a market. It shows the total quantity that all sellers together are willing and able to sell at each price.
Numerical example:
If three firms supply the following quantities at a price of $10:
| Firm | Quantity supplied at $10 |
|---|---|
| Firm A | 40 units |
| Firm B | 60 units |
| Firm C | 30 units |
Market supply at $10 = 40 + 60 + 30 = 130 units. Repeating this for each price gives the market‑supply schedule, which is then plotted as the market‑supply curve.
A movement along the curve occurs when price changes while all other determinants stay the same. The curve itself does not shift.
Example: If the price of a widget rises from \$10 to \$12, the quantity supplied might rise from 100 units to 130 units. On the diagram this is shown as a movement from point A to point B on the same curve.
When any determinant other than price changes, the whole supply curve shifts:
Real‑world example: The introduction of a faster production technology reduces unit costs. This causes a right‑shift because producers can now supply more at each price.
Supply interacts with demand to set the market price. The point where the supply curve meets the demand curve is the equilibrium price (Pe) and the corresponding equilibrium quantity (Qe). If the actual price is above Pe, there is a surplus (quantity supplied > quantity demanded) and producers will tend to lower price, moving the market back toward equilibrium. If the price is below Pe, there is a shortage and producers will raise price, again moving toward equilibrium.
| Determinant | Effect on Supply (ceteris paribus) |
|---|---|
| Input (factor) prices | Higher input costs → supply decreases; lower input costs → supply increases. |
| Technology | Improved technology → supply increases; outdated technology → supply decreases. |
| Number of sellers | More sellers → supply increases; fewer sellers → supply decreases. |
| Expectations of future price | Expect higher future price → current supply may fall (producers hold stock); expect lower future price → current supply may rise. |
| Taxes and subsidies | Higher taxes → supply decreases; subsidies → supply increases. |
| Government regulations | Stringent regulations (e.g., quotas) → supply decreases; deregulation → supply increases. |
| Spare capacity | Excess capacity allows firms to increase output quickly → supply becomes more elastic (right‑shift). |
Price elasticity of supply measures the responsiveness of the quantity supplied to a change in price.
\[
\text{PES} = \frac{\%\Delta Q_s}{\%\Delta P}
\]
where \(\%\Delta Q_s\) is the percentage change in quantity supplied and \(\%\Delta P\) is the percentage change in price.
| Determinant | Typical effect on PES |
|---|---|
| Time‑frame | Supply is more elastic in the long run because firms can adjust plant size, enter or exit markets. |
| Spare capacity | Excess capacity → higher PES; capacity already fully utilised → lower PES. |
| Availability of inputs | Readily available inputs → higher PES; scarce inputs → lower PES. |
| Flexibility of production techniques | Flexible (e.g., modular) processes → higher PES. |
Suppose the price of a good rises from \$20 to \$25 (a 25 % increase) and the quantity supplied rises from 200 units to 260 units (a 30 % increase).
\[
\text{PES} = \frac{30\%}{25\%} = 1.2
\]
Because PES > 1, supply is elastic over this price range.
On a supply diagram, a more elastic supply curve is flatter (shallower slope), while a more inelastic supply curve is steeper. Two curves drawn on the same axes illustrate the difference:
While this note focuses on supply, the concept of elasticity is analogous to price elasticity of demand. Both are examined in the exam, and the same formulaic approach (percentage change in quantity / percentage change in price) is used.
Supply curves are used when discussing market failure (e.g., external costs shift the supply curve upward) and the role of government in mixed economies (taxes, subsidies, regulation). Understanding how the supply curve shifts helps students analyse the impact of policy measures.
Supply decisions are made by firms (production of goods) and by households in the labour market (supply of labour). Wage changes affect the labour‑supply curve in the same way price changes affect a product‑supply curve.
Supply‑side policies such as infrastructure investment, deregulation or tax cuts aim to shift the aggregate‑supply curve to the right, increasing the economy’s productive capacity.
Your generous donation helps us continue providing free Cambridge IGCSE & A-Level resources, past papers, syllabus notes, revision questions, and high-quality online tutoring to students across Kenya.