Diagrams that illustrate movements along a supply curve

Cambridge IGCSE Economics (0455) – Allocation of Resources: Supply

Learning Objective

By the end of this unit students will be able to:

  • Define supply and state the law of supply.

  • Identify and explain the six main determinants of supply.

  • Describe and illustrate movements along a supply curve.

  • Distinguish movements along a curve from shifts of the whole supply curve.

  • Explain how price changes arise and what they mean for equilibrium.

  • Calculate and interpret the price elasticity of supply (PES).

  • Compare short‑run and long‑run supply behaviour.

  • Link supply decisions to market equilibrium and the price mechanism.

1. Definition of Supply

Supply is the quantity of a good or service that producers are willing and able to sell at each possible price, ceteris paribus (all other factors remaining unchanged).

2. The Law of Supply

Holding all other determinants constant, an increase in the price of a good leads to an increase in the quantity supplied, and a decrease in price leads to a decrease in the quantity supplied.

Mathematically:

\$Qs = f(P), \qquad \frac{dQs}{dP} > 0\$

2.5 Price Changes (Causes & Consequences)

  • Price changes occur when either the demand curve or the supply curve shifts.

  • If demand shifts right, the new equilibrium price rises and the quantity supplied moves up along the existing supply curve.

  • If supply shifts left, the new equilibrium price rises and the quantity demanded moves down along the existing demand curve.

  • Thus, a change in price always produces a movement along the opposite curve, while the curve that shifts reflects the underlying determinant that has changed.

3. Determinants of Supply (Factors that Shift the Curve)

DeterminantEffect on the Supply CurveReason (ceteris paribus)
Input prices (wages, raw materials)Higher input prices → shift left (decrease); lower input prices → shift right (increase)Higher costs raise marginal cost, reducing willingness to supply at each price.
TechnologyImprovement → shift right; deterioration → shift leftBetter technology lowers marginal cost or raises productivity.
Number of sellersMore sellers → shift right; fewer sellers → shift leftMore firms increase total market supply.
Expectations of future pricesExpect price rise → shift left (hold back stock); expect price fall → shift right (sell now)Producers adjust current supply based on anticipated profitability.
Taxes & subsidiesTax on production → shift left; subsidy → shift rightTaxes increase marginal cost; subsidies reduce it.
Legal & regulatory factors (licences, quotas, environmental rules)More restrictive regulation → shift left; deregulation → shift rightRegulations affect the cost or ability to produce.

4. Movements Along the Supply Curve

A movement along the same supply curve occurs only because the price of the good itself changes.

Supply curve with points A and B

Figure 1 – Movement from point A (\$P1\$, \$Q1\$) to point B (\$P2\$, \$Q2\$) on the unchanged upward‑sloping supply curve S as the market price rises.

Step‑by‑Step Explanation

  1. Market price rises from \$P1\$ to \$P2\$.

  2. At the higher price producers can cover a larger portion of their marginal cost.

  3. Consequently, the quantity they are willing to supply increases from \$Q1\$ to \$Q2\$.

  4. This change is shown by moving from point A to point B on the same curve S.

5. Shifts of the Supply Curve (for Comparison)

When any determinant listed in Section 3 changes, the whole curve moves.

Rightward shift of supply curve

Figure 2 – A rightward shift from \$S1\$ to \$S2\$ because of a fall in input prices (e.g., cheaper raw material).

6. Price Elasticity of Supply (PES)

  • Definition: The responsiveness of the quantity supplied to a change in price.

  • Formula:

    \$\$\text{PES}= \frac{\%\Delta Q_s}{\%\Delta P}

    =\frac{\dfrac{Q2-Q1}{Q1}}{\dfrac{P2-P1}{P1}}\$\$

  • Interpretation

    • Elastic supply (PES > 1) – producers can increase output quickly when price rises.

    • Unit‑elastic supply (PES = 1) – percentage change in quantity equals percentage change in price.

    • Inelastic supply (PES < 1) – quantity supplied changes little with price.

    • Perfectly elastic (PES = ∞) – any price above a minimum elicits unlimited supply.

    • Perfectly inelastic (PES = 0) – quantity supplied is fixed regardless of price.

  • Determinants of PES

    • Time period – supply is more elastic in the long run.

    • Availability of spare capacity.

    • Ease of obtaining additional inputs.

    • Mobility of factors of production.

7. Short‑Run vs Long‑Run Supply

  • Short‑run supply – at least one input (e.g., plant size) is fixed; the curve is relatively steep (inelastic).

  • Long‑run supply – all inputs can be varied; firms can enter or exit; the curve is flatter (more elastic).

Kinked supply curve showing short‑run and long‑run segments

Figure 3 – The short‑run segment (steeper) and the long‑run segment (flatter) of a supply curve.

8. Link to Market Equilibrium & the Price Mechanism

The interaction of the supply curve (S) with the demand curve (D) determines the market equilibrium price (\$Pe\$) and quantity (\$Qe\$). Changes affect equilibrium as follows:

  • Movement along S (price change) – shifts the equilibrium point up or down the demand curve.

  • Shift of S – moves the entire supply curve left or right, creating a new equilibrium price and quantity.

  • Surplus (Qs > Qd) pushes price down; shortage (Qd > Qs) pushes price up, restoring equilibrium via the price mechanism.

9. Practice Questions

  1. Explain why a rise in the price of wheat from £0.30 kg⁻¹ to £0.40 kg⁻¹ leads to a movement along the wheat supply curve rather than a shift.

  2. For each of the following, state whether the supply curve for smartphones shifts left, right, or stays unchanged, and give a brief reason:

    • Decrease in the cost of micro‑chips.

    • Introduction of a new tax on electronic waste.

    • Improvement in production technology.

  3. On a diagram, illustrate a movement along the supply curve when the price of a good falls from \$P3\$ to \$P4\$. Label the two points and describe the economic reasoning in 2–3 sentences.

  4. Calculate the price elasticity of supply if the quantity supplied of oranges rises from 200 tonnes to 260 tonnes when the price rises from £0.50 kg⁻¹ to £0.60 kg⁻¹. State whether supply is elastic, unit‑elastic or inelastic.

  5. Discuss how the short‑run and long‑run supply responses of a clothing manufacturer might differ after a sudden increase in the price of cotton.

10. Summary Checklist

  • Supply = quantity producers are willing & able to sell at each price, ceteris paribus.

  • Law of supply: price ↑ → quantity supplied ↑ (movement up the curve); price ↓ → quantity supplied ↓ (movement down).

  • Only a change in the good’s own price causes a movement along the curve.

  • All other determinants cause the whole curve to shift left (decrease) or right (increase).

  • Price changes arise from shifts in demand or supply and generate movements along the opposite curve.

  • PES measures how responsive supply is to price changes; it is larger in the long run.

  • Short‑run supply is relatively inelastic; long‑run supply is more elastic.

  • Movements or shifts alter market equilibrium, activating the price mechanism.