1The idea in one paragraph

When a good sells for more, firms want to make more of it. When it sells for less, they make less, and the ones who can barely cover their costs stop making it at all. That is the law of supply, and the supply curve is that sentence drawn as a line sloping upwards. As in 2.1, everything else comes down to two questions: what happens on the line when the price moves, and what happens to the line when anything else moves.

2The law of supply

Start with the word. Supply is the quantity of a good that producers are willing and able to produce and sell, at a given price, over a given period of time. A grower who could pick a thousand punnets of strawberries but will not do it at 40 cents a punnet is supplying nothing at 40 cents. Willingness and ability both have to be there, and so does the price and the period.

The law of supply says: as the price of a good rises, the quantity supplied rises, and as the price falls, the quantity supplied falls, ceteris paribus. Price and quantity supplied move in the same direction, so they are directly related. That is the opposite of demand, where the two move in opposite directions, and it is why the two curves cross.

Why would a higher price bring out more? Two plain reasons, both worth a mark.

• A higher price makes production worth doing. Some growers can pick a punnet cheaply and some cannot. At a low price only the cheapest can cover their costs. Raise the price and growers who were losing money at the old price now cover theirs, so they join in.
• A higher price makes it worth stretching. A grower already in the market can pay for overtime picking, rent a second cold store, or harvest a field that is awkward to reach. None of that is worth doing at a low price. All of it becomes worth doing at a high one.

Now the wording that examiners test. Quantity supplied is one number: how much firms offer at one particular price. Supply is the whole relationship: how much they would offer at every possible price, which is the entire curve. A price rise does not "increase supply". It increases the quantity supplied.

3The supply curve

Take the strawberry growers around one small town and write down how many punnets they would bring to market each week at each price.

That table is a supply schedule. Plot it with price up the side and quantity along the bottom, join the points, and you have the supply curve. Figure 1 does that with the strawberry numbers.

Two habits to build straight away.

Price goes on the vertical axis, exactly as it does for demand. Both curves have to share a pair of axes in 2.3, so they must be drawn the same way round.

The curve is normally drawn as a straight line, and it is still called a curve. It usually starts a little way up the price axis rather than at the origin, because below some price nobody produces anything at all.

Figure 2 shows what happens when the price alone changes.

The price rises from P₁ to P₂, and we slide up the same line from point A to point B, so the quantity supplied rises from Q₁ to Q₂. That is a movement along the supply curve. The line has not gone anywhere. Older textbooks call a slide up the curve an extension of supply and a slide down a contraction; the guide says "movement along the supply curve", so say that.

4From one producer to the whole market

Every firm has its own supply curve, because every firm has its own costs. The market supply curve is all of them added together, price by price.

Take two of our growers. At €2.00 Deniz brings 300 punnets and Mert brings 600, so the market brings 900. At €4.00 Deniz brings 700 and Mert 1,200, so the market brings 1,900. Do the same addition at every price and you have the market curve, which is the third panel of Figure 3.

You are adding quantities sideways, so this is called horizontal summation, and the market curve always lies further to the right and is flatter than any single firm's curve. Two things follow, and both matter later. The market curve slopes up for exactly the reasons the individual curves do. And the number of firms in the market changes the market curve even when no single firm has changed its behaviour at all.

5What moves the whole curve: the six non-price determinants

The supply curve is drawn on the assumption that everything except the good's own price is fixed. When one of those fixed things changes, the old curve is wrong at every price, so the whole curve moves. The guide lists six non-price determinants of supply. Learn all six, with an example and a direction each.

One warning about words before the list. An increase in supply means firms will offer more at every price, and the curve moves to the right, which on the page also looks like moving down. A decrease in supply moves the curve to the left, which also looks like moving up. Say right and left, never up and down, and you will not talk yourself into the wrong answer.

Changes in the costs of factors of production. Wages, rent, interest on borrowing, the price of fertiliser, fuel, packaging. If a factor of production becomes dearer, producing each punnet costs more, fewer growers can cover their costs at the old price, and supply falls: the curve shifts left. If a factor becomes cheaper, supply rises and the curve shifts right. Figure 4 shows both.

Prices of related goods. Two cases here, and you must name which one you mean.

• Joint supply is when two goods come out of the same process, so making more of one automatically makes more of the other. A dairy separating raw milk gets cream and skimmed milk together. If the price of cream rises, the dairy separates more milk, and more skimmed milk appears whether anyone asked for it or not. The supply of skimmed milk shifts right.
• Competitive supply is when two goods compete for the same resources, so making more of one means making less of the other. Our growers can plant a field with strawberries or with courgettes, not both. If the price of courgettes rises, land moves to courgettes and the supply of strawberries shifts left.

Indirect taxes and subsidies. An indirect tax is a tax on a good rather than on income, collected from the seller. It is a cost the firm must now cover on every unit, so supply falls and the curve shifts left. A subsidy is a payment from the government to the producer for each unit made, which takes a cost away, so supply rises and the curve shifts right. Figure 6 shows both, and shows the thing markers look for: the gap between the two curves, measured vertically, is the size of the tax or the subsidy on one unit.

Future price expectations. If growers expect the price of strawberries to be much higher next month, some will hold stock back and sell less now, so supply today shifts left. If they expect the price to collapse, they clear their stores now and supply today shifts right. Nothing about today's price has changed, only the belief about tomorrow's, which is why this is a shift.

Changes in technology. Better irrigation, a machine that grades punnets faster, a variety that ripens more evenly. Improved technology lowers the cost of producing each unit, so supply rises and the curve shifts right. Technology can also go backwards, in effect, if a machine breaks down or a system fails, and then supply falls.

Number of firms. More firms in the market means more supply at every price and a rightward shift, straight from the summation in section 4. Fewer firms, because some have left the industry or a licence has been withdrawn, means a leftward shift.

A sentence pattern that earns the mark every time: name the determinant, say which way it changed, say which way supply shifts, and say why. "A subsidy of €0.50 per punnet lowers the cost to the grower of supplying each punnet, so supply increases and the curve shifts to the right."

6Movement along versus shift, again

This is the same rule you met in 2.1, and it is tested just as hard on the supply side. Figure 7 puts the two cases next to each other.

If the good's own price changed, move along the curve. If anything else changed, shift the curve.

Section 6 of 2.1 explains why that rule holds and gives you a five-second test to run in the exam; it works the same way here, so go back and read it rather than learning a second version. What changes on the supply side is only the wording. A movement along the curve is a change in quantity supplied. A shift of the curve is a change in supply.

Check yourself on two cases. The price of strawberries rises and growers bring more to market: movement, because the good's own price changed, so quantity supplied rose. Now, wages for pickers fall and growers bring more to market at every price: shift, because a cost of production changed, so supply rose and the curve moved right.