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Microeconomics guide, Unit 2, step 7 of 28Previous stepNext step

Step 7: Supply

By the EconTutorials team. 10-minute read with 6 practice questions.
SyllabusAP Micro 2.2 · Cambridge 2.1 · IB 2.2
In 30 seconds
  • Supply is the quantity of a good producers are willing and able to sell at each possible price, in a given time period, ceteris paribus.
  • The Law of Supply: as price rises, quantity supplied rises, so the supply curve slopes upward. The reasons are the profit motive, rising marginal cost and new firms entering.
  • A change in the good’s own price causes a movement along the curve. A change in a non-price factor (ROTTEN: resource prices, other goods’ prices, technology, taxes and subsidies, expectations, number of sellers) shifts it.
  • Exam point: anything that raises firms’ costs (dearer inputs, a tax) shifts supply left; anything that cuts costs (better technology, a subsidy) shifts it right.
Video lesson coming soonA short animated lesson for this step will appear here.

What supply means: the seller’s side of the market

Imagine you run a small bakery. If bread sells for $2 a loaf, it is barely worth turning on the big oven: you bake 50 loaves. At $5, you happily bake 200. At $8, you pay your staff overtime and bake 400. How much you offer for sale depends on the price you can get.

That is supply. Demand (Step 5) comes from buyers; supply comes from sellers. Like demand, supply is not one number: it is a whole relationship between price and quantity.

Key termSupply: the quantity of a good producers are willing and able to sell at each possible price, in a given time period, ceteris paribus.

A table of price and quantity pairs is a supply schedule. Plotted with price on the vertical axis and quantity on the horizontal axis, it gives the supply curve. Here is a schedule for bread in a town:

Price per loaf ($)Quantity supplied (loaves per day)
1100
2250
3400
4500
5550

“Supply” means the whole schedule or curve. “Quantity supplied” means one point on it, at one price. Keep the two words separate, just as you did with demand.

The Law of Supply and why the curve slopes up

Read down the schedule: the higher the price, the more firms offer for sale. Price and quantity supplied move in the same direction, so the supply curve slopes upward from left to right, the opposite of the demand curve.

Key termLaw of Supply: ceteris paribus, as the price of a good rises, the quantity supplied rises, and as the price falls, the quantity supplied falls.

There are three reasons for it:

  1. The profit motive. A higher price makes production more profitable, so existing firms make more. When the price falls, profits shrink and firms cut back.
  2. Rising marginal cost. Marginal cost is the cost of producing one extra unit. It usually rises as output grows: overtime wages, older machines, dearer inputs. Firms only make those costly extra units if the price is high enough to cover them.
  3. New entrants. Higher prices attract new firms. If the price of coffee rises a lot, new plantations and cafés appear, and total market supply grows.

Movement along vs shift of the supply curve

This works exactly as it does for demand.

  • Movement along the curve: only the good’s own price changes. This is a change in quantity supplied. In the bread schedule, a rise from $2 to $4 raises quantity supplied from 250 to 500 loaves, an extra 250.
  • Shift of the curve: a non-price factor changes, so the whole curve moves. Right means an increase in supply (more at every price); left means a decrease in supply (less at every price).
Common mistakeDrawing a price change as a shift, or a cost change as a movement. If a new technology cuts production costs, you must shift the supply curve right: the price of the good has not changed, a non-price factor has. A rise in the good’s own price only moves you along the existing curve.

What shifts the supply curve? (ROTTEN)

DeterminantShifts supply RIGHT when…Shifts supply LEFT when…
Resource prices (input costs)Labour, materials or energy get cheaperInput costs rise, for example an oil price spike
Other goods’ pricesA joint product’s price rises (more beef means more leather)A competing good’s price rises (corn pays better, so less wheat)
TechnologyBetter methods cut costs(Technology rarely gets worse)
Taxes and subsidiesA subsidy lowers producers’ costsA tax raises producers’ costs
ExpectationsProducers expect prices to fall, so they sell nowProducers expect prices to rise, so they hold stock back
Number of sellersNew firms enterFirms leave the market

Two terms need care. In competitive supply, the same resources can make either of two goods: a farmer can grow wheat or corn. If corn’s price rises, land switches to corn and wheat supply shifts left, even though wheat’s own price has not changed. In joint supply, two goods come out of the same process: beef and leather. A higher beef price means more cattle are processed, so leather supply shifts right.

Key termJoint supply: when two goods are produced together, so producing more of one automatically increases the supply of the other.

A tax as a cost. A tax per unit on producers acts like a rise in input costs. To supply the same quantity as before, firms now need a price that is higher by the full amount of the tax. So the supply curve shifts left, or equivalently moves up, by the amount of the tax:

\[ P_{\text{new}} = P_{\text{old}} + t \quad \text{(for each quantity supplied)} \]
Worked example

Before a tax, the supply schedule for juice is: 300 cartons at $4, 450 at $5 and 600 at $6. The government puts a tax of $1.50 per carton on producers. Write the new schedule and state the quantity supplied at a market price of $6 before and after the tax.

Step 1Add the tax to each price: \( \$4 + \$1.50 = \$5.50 \), \( \$5 + \$1.50 = \$6.50 \), \( \$6 + \$1.50 = \$7.50 \)
Step 2New schedule: 300 at \$5.50, 450 at \$6.50, 600 at \$7.50
Step 3At \$6: before the tax, \( Q_s = 600 \). After the tax, producers keep \( \$6 – \$1.50 = \$4.50 \), which lies between \$4 (300) and \$5 (450), so they now supply fewer than 450

The supply curve has shifted left (upward) by $1.50, the amount of the tax. At any market price, producers now supply less than before. A subsidy works the other way round and shifts supply right.

Market supply and the role of time

Market supply is the total quantity supplied by all firms at each price: the horizontal sum of the individual supply curves. If there are 200 wheat farms and each supplies 50 tonnes at $200 a tonne, market supply at $200 is \( 200 \times 50 = 10{,}000 \) tonnes. Market supply also slopes upward because high prices draw new firms in, and low prices push weak firms out.

Time matters. How much supply can respond depends on how long firms have:

Time periodWhat firms can changeSupply curve
Very short run (hours or days)Almost nothing: you cannot grow wheat overnightVery steep, nearly vertical
Short run (weeks to months)Labour, shifts and raw materials, but not factory sizeFlatter (more responsive)
Long run (months to years)Everything: new factories, new technology, entry and exitFlatter still (most responsive)

This is why prices often spike after a sudden supply shock and then ease as supply catches up. OPEC shows supply shifts clearly. In 1973 it cut oil production, shifting the world supply curve left, and the oil price quadrupled from $3 to $12 a barrel. In 2022, sanctions on Russian oil shifted supply left again and prices rose above $120 a barrel.

Exam tipFor any supply question, ask first: did the good’s own price change? If yes, it is a movement. If no, name the ROTTEN determinant, give the direction (left or right) and explain the effect on costs or the number of sellers. On diagrams, label S₁ and S₂, draw an arrow showing the shift, and keep price on the vertical axis.

Practise: 6 questions

Try each one on paper first, then check the worked answer.

EasyQ1. The price of oil (a key input in plastic) rises. What happens to the supply curve for plastic products? Show worked answer
It shifts left. Higher oil prices raise production costs, so firms supply less plastic at every price. The determinant is resource prices (R in ROTTEN).
EasyQ2. Beef and leather are in joint supply. If the price of beef rises, what happens to the supply of leather? Show worked answer
Leather supply shifts right. A higher beef price means more cattle are processed, and each one also produces leather as a by-product.
MediumQ3. Using the bread schedule ($1 → 100, $2 → 250, $3 → 400, $4 → 500, $5 → 550): (a) What is the change in quantity supplied if the price rises from $2 to $4? (b) A new bakery opens, adding 100 loaves at every price. Write the new schedule. Movement or shift? Show worked answer
(a) 500 − 250 = 250 more loaves. This is a movement along the curve, because only the price of bread changed.
(b) New schedule: $1 → 200; $2 → 350; $3 → 500; $4 → 600; $5 → 650.
This is a rightward shift: a non-price factor (number of sellers) changed.
MediumQ4. A market has 40 identical firms, each supplying 15 units at $10, 25 units at $14 and 40 units at $18. (a) Find market supply at each price. (b) Eight firms leave the market. What is market supply at $14 now? (c) Which determinant changed, and which way does the curve shift? Show worked answer
(a) $10: 40 × 15 = 600. $14: 40 × 25 = 1,000. $18: 40 × 40 = 1,600.
(b) 40 − 8 = 32 firms. 32 × 25 = 800 units at $14.
(c) Number of sellers (N in ROTTEN). Fewer firms means less supplied at every price, so the supply curve shifts left.
MediumQ5. For the supply of wheat, state left, right or no shift: (a) the price of wheat rises 15%; (b) a new drought-resistant variety is developed; (c) the price of corn (grown on the same land) rises sharply; (d) the government removes a subsidy on wheat. Show worked answer
(a) No shift: the good’s own price changed, so it is a movement along the curve.
(b) Shift right: better technology raises output per hectare and lowers cost.
(c) Shift left: corn is in competitive supply with wheat, so farmers switch land to corn.
(d) Shift left: removing the subsidy raises producers’ effective costs.
ExamQ6. A tax of $2 per unit is placed on producers of sugary drinks. Before the tax, Qs = 500 at $3, 700 at $4 and 900 at $5. (a) Write the new supply schedule. (b) Which way has supply shifted, and by how much? Use the quantity at $5 to illustrate. [4 marks] Show worked answer
(a) Producers need $2 more to supply each quantity: 500 at $5, 700 at $6, 900 at $7. (2)
(b) The supply curve has shifted left (upward) by $2, the amount of the tax. (1) For example, at a market price of $5, quantity supplied was 900 before the tax but is only 500 after it. (1)

Check yourself

1. Which of these causes a MOVEMENT ALONG the supply curve for coffee?

Only a change in the good’s own price moves you along the curve; the others shift it.

2. OPEC cuts oil production to raise prices. On a diagram, this is:

Less oil is offered at every price, so the supply curve shifts left and the price rises.

3. Why is supply more responsive in the long run than in the short run?

In the long run all factors of production can be varied, so supply can adjust much more.

Your score: 0 out of 3

The short version

  • Supply is the quantity producers are willing and able to sell at each possible price, ceteris paribus.
  • The supply curve slopes upward because of the profit motive, rising marginal cost and new firms entering.
  • Own-price change: movement along the curve (change in quantity supplied). Non-price change: shift (change in supply).
  • ROTTEN shifters: resource prices, other goods’ prices, technology, taxes and subsidies, expectations, number of sellers. Higher costs or a tax shift supply left; lower costs, better technology or a subsidy shift it right.
  • Market supply is the horizontal sum of individual supply curves, and supply becomes more responsive the more time firms have to adjust.

This guide covers the core of Chapter 6 of Economics Made Simple. The full chapter adds labelled supply diagrams, the full OPEC case study and a 15-question exam practice set with a full answer key. In Step 7, demand and supply come together to find the equilibrium price.

Further reading on EconTutorials

Older in-depth articles on this topic from our blog:

Want more questions like these, with worked answers?
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Next: step 8 of 28Market Equilibrium and Price