In simple terms
A friendly intro before the formal notes — no formulas yet.
Why Firms Sell More When the Price Is High
Supply is about producers, not consumers. When the price of a product rises, firms have a stronger incentive to make and sell more of it, because each unit sold is now more profitable — and because they will only cover the higher cost of squeezing out extra output if they receive a higher price.
Imagine you offer a dog-walking service. If neighbours pay £5 a walk you might fit in two walks a week. If a new family offers £15 a walk, you will happily rearrange your evenings to walk more dogs — even giving up gym time to do it. The higher price both rewards you more per walk and makes the extra effort worth its rising cost. Firms reason in exactly the same way.
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Supply is the quantity producers are WILLING and ABLE to offer for sale at each price over a period of time.
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The law of supply: ceteris paribus, a higher price leads to a higher quantity supplied — a positive relationship.
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This gives an upward-sloping supply curve, with Price on the vertical axis and Quantity on the horizontal axis. A change in the good's OWN price is a movement ALONG the curve.
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Non-price determinants — costs, technology, taxes, subsidies, expectations, number of firms, shocks — SHIFT the whole curve left or right.
Explore the concept
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Full topic notes
Formal explanation with the rigour you need for the exam.
The concept of supply
In economics, supply is a precise idea, not just 'how much exists'. Supply is the quantity of a good or service that a producer is both willing and able to offer for sale at each possible price, over a particular time period. 'Willing' points to the profit motive — firms supply because they expect to gain; 'able' points to productive capacity — they must actually have the resources to make the good. Both conditions must hold: a firm that would love to sell but cannot produce, or could produce but sees no profit, supplies nothing.
The law of supply and the supply curve
The law of supply states that, ceteris paribus (all other factors held constant), as the price of a good rises the quantity supplied rises, and as the price falls the quantity supplied falls. Price and quantity supplied move in the SAME direction — a positive relationship — which is why the supply curve slopes upward. By convention Price is on the vertical axis and Quantity is on the horizontal axis, and the curve is labelled S.
Positive relationship: price and quantity supplied move in the same direction, giving an upward-sloping curve.
Profit motive: at a higher price, with costs unchanged, each unit is more profitable, so firms allocate more resources to producing the good.
Rising marginal cost: producing each extra unit in the short run tends to cost more (overtime, less-suitable inputs). Firms will only incur that rising cost if the price rises to match — so higher output requires a higher price.
Marginal-cost intuition: a firm supplies one more unit only when its price at least covers the marginal cost of making it. The supply curve is effectively the marginal cost curve — which is exactly why it rises.
Movements along vs. shifts of the supply curve
This is the single most tested distinction in microeconomics. A change in the price of the good ITSELF causes a movement along the supply curve — a change in quantity supplied. A change in any OTHER factor affecting a producer's willingness or ability to sell causes the whole curve to shift — a change in supply. Getting the language right is worth marks in itself.
Movement along the curve: caused ONLY by a change in the good's own price → 'change in quantity supplied'.
Shift of the curve: caused by a change in a non-price determinant → 'change in supply'.
Increase in supply (rightward shift): firms supply MORE at every price — e.g. a new, more efficient technology lowers costs.
Decrease in supply (leftward shift): firms supply LESS at every price — e.g. a new tax or a rise in input costs.
Be surgical with language. 'Supply increases' means the whole curve shifts (a non-price cause). 'Quantity supplied increases' means a movement along the curve (a price cause). Writing 'supply rises' when the price rose — or drawing a shift when you mean a movement — costs marks even if the rest of your answer is correct. Say the exact phrase, then match it to the exact diagram move.
Non-price determinants of supply
These are the factors held constant by ceteris paribus. When one of them changes, the supply curve shifts. A useful memory aid is that almost all of them work by changing the cost or profitability of producing each unit — lower cost shifts supply right, higher cost shifts it left.
Costs of factors of production: higher wages, rent, or raw-material prices raise unit costs → supply DECREASES (shifts left). Lower input costs shift it right.
Technology: an improvement lowers unit costs and raises productivity → supply INCREASES (shifts right).
Indirect taxes: a specific or ad valorem tax raises the cost of supplying each unit → supply DECREASES (shifts left, vertically up by the tax per unit).
Subsidies: a per-unit government payment lowers effective cost → supply INCREASES (shifts right, vertically down by the subsidy per unit).
Producer price expectations: if firms expect a much higher future price, they may withhold stock now to sell later → current supply DECREASES (shifts left).
Number of firms: more firms entering raises market supply (shifts right); firms leaving reduces it (shifts left).
Supply shocks / weather: for agricultural and commodity goods, good weather raises supply (shifts right); droughts, floods or disasters reduce it (shifts left).
Individual supply and market supply
Everything so far describes one firm's supply. Market supply is the total that ALL producers in a market offer, found by horizontal summation — at each price, add up the quantities every firm is willing to supply. Because more producers contribute at every price, the market supply curve is flatter and further to the right than any single firm's curve.
Common mistakes examiners penalise
Confusing 'supply' with 'quantity supplied' — 'supply' is the whole curve; 'quantity supplied' is one point. Use 'change in quantity supplied' for price-driven movements and 'change in supply' for non-price shifts.
Drawing a shift when the cause is the good's OWN price (or vice versa) — a price change is ALWAYS a movement along the curve, never a shift.
Getting the shift direction wrong for taxes and subsidies — a tax RAISES cost so supply shifts LEFT; a subsidy LOWERS cost so supply shifts RIGHT. Weak answers reverse these.
Mislabelling the axes — Price MUST be on the vertical axis and Quantity on the horizontal. An unlabelled or reversed diagram cannot reach the top band.
Forgetting ceteris paribus — the law of supply only holds with other factors constant; stating this shows the examiner you understand the assumption.
Confusing the beans-vs-lattes trap — a change in an INPUT price shifts the supply of the FINISHED good, but changes the quantity supplied of the input itself. Always identify whose supply curve you are analysing.
Worked examples
See the formulas applied — reveal one step at a time, like the exam.
A local bakery's supply schedule for croissants is shown below.
| Price per croissant (£) | Quantity supplied per day |
|---|---|
| 1.00 | 50 |
| --- | --- |
| 1.50 | 100 |
| 2.00 | 150 |
| 2.50 | 200 |
| 3.00 | 250 |
(a) Describe how you would draw the supply curve and state its shape. (b) If the market price rises from £1.50 to £2.50, describe the change precisely and explain what causes it.
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Put Price (£) on the vertical axis and Quantity supplied per day on the horizontal axis.
The market for electric cars is initially at supply curve S1. The government introduces a £2,000 subsidy to manufacturers for each electric car produced.
Using a supply diagram, explain the effect on the supply of electric cars, and state precisely how the shift is drawn.
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A subsidy is a per-unit payment from the government to producers, so it lowers the effective cost of producing each electric car.
A market for handmade candles has just two producers. Their individual supply schedules are:
| Price (£) | Firm A quantity | Firm B quantity |
|---|---|---|
| 2 | 10 | 20 |
| --- | --- | --- |
| 4 | 30 | 40 |
| 6 | 50 | 60 |
(a) Derive the market supply schedule. (b) A third producer, Firm C, now enters and supplies 15 candles at £2, 25 at £4 and 35 at £6. State what happens to the market supply curve and why.
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(a) Horizontal summation — add the two quantities at each price:
- At £2: 10 + 20 = 30 candles.
- At £4: 30 + 40 = 70 candles.
- At £6: 50 + 60 = 110 candles. The market supply schedule is therefore (£2, 30), (£4, 70), (£6, 110) — an upward-sloping market supply curve.
Paper 1, part (a): Explain, using a supply diagram, the law of supply and TWO non-price determinants that could shift the supply curve. [10 marks]
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Model answer: The law of supply states that, ceteris paribus, as the price of a good rises its quantity supplied rises, and as price falls quantity supplied falls — a positive relationship between price and quantity supplied. This gives an upward-sloping supply curve. Two reasons explain the slope: the profit motive (a higher price with unchanged costs makes each unit more profitable, so firms produce more) and rising marginal cost (extra output in the short run costs more per unit, so firms need a higher price to supply it).
How it all connects
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Glossary
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Quick check
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Revision flashcards
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Supply
The quantity of a good or service that producers are WILLING and ABLE to offer for sale at each possible price over a given time period. Willingness is tied to profit; ability is tied to productive capacity.
Key takeaways
Review these before you close the topic — retrieval beats re-reading.
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Positive relationship: price and quantity supplied move in the same direction, giving an upward-sloping curve.
- ✓
Profit motive: at a higher price, with costs unchanged, each unit is more profitable, so firms allocate more resources to producing the good.
- ✓
Rising marginal cost: producing each extra unit in the short run tends to cost more (overtime, less-suitable inputs). Firms will only incur that rising cost if the price rises to match — so higher output requires a higher price.
- ✓
Marginal-cost intuition: a firm supplies one more unit only when its price at least covers the marginal cost of making it. The supply curve is effectively the marginal cost curve — which is exactly why it rises.
Practice — then mark it
The whole point: a real Cambridge question, marked mark-by-mark.
Get a Paper 1 (a) answer marked: use a supply diagram to explain the law of supply and two non-price determinants
Get a Paper 1 (a) answer marked: use a supply diagram to explain the law of supply and two non-price determinants
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Checkpoint
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Before you move on: do Get a Paper 1 (a) answer marked: use a supply diagram to explain the law of supply and two non-price determinants on paper, snap a photo, and get examiner-style feedback on exactly where you win and lose marks.