2.2 Supply

The Law of Supply

The law of supply states that as price rises, quantity supplied rises too, all else equal — producers are willing to sell more at higher prices because it's more profitable. This creates an upward-sloping supply curve on a price-quantity graph, showing a direct relationship between price and quantity supplied.

Movement vs. Shift

A change in price causes a movement along the existing supply curve (change in quantity supplied). A change in a non-price determinant — input costs, technology, number of sellers, expectations, or prices of related goods — causes the entire curve to shift, changing supply itself.

Determinants of Supply

Key shifters include: input/resource prices (higher costs shift supply left), technology (improvements shift supply right), number of sellers, producer expectations, taxes/subsidies, and prices of related goods in production. A rightward shift means more is supplied at every price; leftward means less.

Key terms

Law of Supply

As price increases, quantity supplied increases, all else equal — creating an upward-sloping supply curve.

Movement along the supply curve

Caused by a change in the good's own price; reflects a change in quantity supplied.

Shift of the supply curve

Caused by a change in a non-price determinant (costs, technology, number of sellers, expectations, taxes/subsidies), changing supply at every price.

Determinants of Supply

Input prices, technology, number of sellers, producer expectations, taxes/subsidies, and prices of related goods in production.

Effect of higher input costs

Raises production costs, shifting the supply curve left (decrease in supply).

Try an AP-style question

Why does the supply curve slope upward?

1. Consumers want more at higher prices
2. Higher prices cover rising marginal costs
3. Costs fall as output rises
4. Taxes rise with price