Chapter 8

Supply
 Learning objectives
By the end of this chapter you will be able to:
Define supply
Distinguish between extensions and
contractions in supply
recognise the link between individual and
market supply in terms of aggregation
analyse the causes of shifts in the supply curve
 8.1 Definition of supply
Supply is the willingness and ability to sell a product. It
is important not to confuse supply with production.
Supply is influenced by the amount produced, but is
not the same as production. This is because some of
the amount produced today may be stored, in order to
be sold at a later date. Conversely, it is possible that
some of the output offered for sale today may have
come from stocks
 8.2 Supply and price
In contrast to demand, supply is directly
related to price. A rise in price will lead to a
rise in supply. Firms will be more willing to
supply the product, as they are likely to earn
higher profits. They will also be able to supply
more as the higher price will make it easier for
them to cover the costs of production.
8.3 Individual and market supply
Individual supply is the supply of one plant/firm,
whereas market supply is the total supply of a
product supplied by all the firms in the industry.
Market supply is calculated in a similar way to
market demand. The quantities that would be
supplied by each firm at each price are added up.
So aggregation of the supply of each individual
firm gives the market supply.
 A supply schedule
A supply schedule records the different
quantities supplied at different prices. Table
8.1 shows a supply schedule for train tickets
from Station X to Station V.
Table 8.1: Daily supply of train tickets from Station X to Station V
Fig. 8.1: Daily supply of train tickets from Station X to Station V
The effect of a change in price on supply

Again, as with demand, a change in price of the

product will cause an extension in supply
(expansion or an increase in the quantity
supplied) or a contraction in supply (a decrease in
the quantity supplied) This time, however, it is a
rise in price Which will cause an extension in
supply and a fall in price which will cause a
contraction in supply.
Figure 8.2 illustrates both these changes
 Answer
• 1 a It would increase market supply.
• b A rise in the price of paper.
 8.4 Conditions of supply
A change in supply occurs when the conditions
facing suppliers alter. In such a situation, a different
quantity will be offered for sale at each price. For
instance, a good period of weather may increase
the rice crop in a country. This will make it possible
for rice farmers to supply more. Table 8.2 shows
the original supply schedule in the previous season
and the supply schedule in the current season.
Table 8.2: Rice production
 Shifts in the supply curve
While a change in the price of the product
itself causes a movement along the supply
curve, a change in supply conditions causes
the supply curve to shift. An increase in supply
is illustrated by a shift to the right as shown in
Figure 83. At each and every price, more is
supplied
Fig. 8.3: An increase in supply
Fig. 8.4: A decrease in supply
 Causes of changes in supply
Among the factors that can cause changes in supply are
1changes in the costs of production,
2 improvements in technology,
3 taxes,
4 subsidies
5 weather conditions, health of livestock and crops,
6 the price of other products
7 Disasters,
8 wars,
9 discoveries of new sources and depletion.
10 change of commodities,
Answer
 Answer
• The supply of rice has increased. This would
cause the price to fall and demand to extend.
B The supply of rice can decrease as a result of
bad weather, disease, an increase in
production costs or an imposition of a tax on
rice.
Changing in the cost of production
If it costs more to produce a product, suppliers will
want a higher price for it, For example, if it costs $200
to produce four units, firms would supply four units at a
price of $50 per unit If costs rise to $280, they would be
prepared to sell only four units, at a price of $70 each.
The two basic reasons for a change in costs of
production are
• a change in the price of any of the factors of
production
• a change in their productivity.
Changing in the cost of production
• If, for example, the price of raw materials used
increases, it will be more expensive to
produce a product .One cost which changes
frequently is the cost of transporting
goods .This is because the price of oil used in
petrol, is itself very volatile.
Answer
 Improvements in technology
• This influence is closely related to the previous one. since
improvements in technology raise the productivity of
capital, reduce costs of production and result in an increase
in supply. It has become much cheaper to produce a range
of products due to the availability of more efficient capital
goods and methods of production. For example, whilst
would demand for personal computers has increased in
recent years. the supply has increased even more as it has
become easier and cheaper to produce them.
 Taxes
• Direct taxes on firms, including corporation tax, and indirect
taxes such as VAT and excise duty, are effectively a cost that
firms have to pay. They are likely to try to recover at least
some of this extra cost by raising the price paid by the
consumers. Nevertheless, the firms themselves are largely
responsible for passing on the revenue from the tax to the
government. A rise in the rate of an existing tax or the
imposition of a new tax, will make it more expensive to
supply a product and hence will reduce supply In contrast, a
cut in a tax or its removal will increase supply.
 TAX
• Tax: A payment to the government.
• Direct Tax: Tax on Income
• Indirect tax: Tax on expenditure.
• Corporate Tax: Tax on profit of a firm
 Subsidies
A subsidy given to the producers provides a financial incentive for
them to supply more. Besides being paid by the consumer, they are
now being paid by the government also.
As a result, the granting of a subsidy will cause an increase in supply.
whilst the removal of a subsidy will cause a decrease in supply.
Most countries, throughout the world ,subsidise some agricultural
products. A number of them also give subsidies to new and
important industries.
Less frequently. a government may also give a subsidy to consumers,
to encourage them to buy a particular product For example. grants
may be given to households to enable them to buy houses In this
case. of course, it is demand and not supply conditions which change
Weather condition and health of livestock
and crops
Changes in weather conditions affect particular agricultural
products. A period of good weather around harvest time is
likely to increase the supply of a number of crops. Very dry,
very wet or very windy weather, however, is likely to
damage a range of crops and thereby reduce their supply.
The amount of agricultural products produced and available
for supply is also influenced by the health of livestock and
crops. The outbreak of a disease, such as foot and mouth in
cattle or blight in crops, will reduce supply.
 Prices of other products
• Firms often produce a range of products. If one product
becomes more popular. its price will rise and supply will
extend. In order to produce more of this product. the firm
may divert the resources from the production of other
products. The prices of these other products have not
changed but the firm will now supply less at each and every
price. For example. if a farmer keeps cattle and sheep. a rise
in the price and profitability of Iamb is likely to result in the
farmer keeping fewer cows and a corresponding decrease in
the supply of beef.
 Disaster and war
• Natural disasters, such as hurricanes, floods
and wars, can result in a significant decrease
in supply. The earthquake and resulting
tsunami that hit Japan in March 2011 caused
extensive damage to infrastructure and killed
workers. These effects reduced the supply of a
range of products.
Discoveries and depletions of commodities

The supply of some commodities. such as coal,

gold and oil, is affected by discoveries of new
sources For example. the discovery of new
oilfields will increase the supply of oil. In
contrast, if coal is used up in some mines, the
supply of coal will be reduced in the future.
 Answer
1 a A decrease in demand – fewer people will be able to afford to
buy the gold bracelets.
B An increase in supply – it will be cheaper to produce gold
bracelets.
C An increase in demand – some people will switch from buying
silver bracelets to buying gold bracelets as they are substitutes.
D A decrease in supply – a higher tax adds an extra cost to
producers.
E An increase in supply – more gold will be available to produce
the gold bracelets.
F A decrease in supply – this will disrupt production.
 Multiple choice questions
I What is the relationship between demand and price
and the relationship between supply and pnce9
Demand and price Supply and price
A directly related directly related
B directly related inversely related
C inversely related directly related
D inversely related inversely related
 Multiple choice questions
• 2 What does a market supply curve show?
A The proportion of total output produced by
different firms in the industry
B Proportion of total output sold
C The relationship between the total quantity
supplied and demand for the product
0 The relationship between the total quantity
supplied and the price of the product
 Multiple choice questions
• 3 How would an increase in supply be
illustrated?
A A movement up the supply curve
B A movement down the supply curve
C A shift to the left of the supply curve
D A shift to the right of the supply curve
 Multiple choice questions
• 4 What would cause an increase in the supply
of milk?
A An increase in the price of cattle feed
B An increase in wages paid to farm workers
C The introduction of a subsidy to cattle
farmers
D The outbreak of a disease affecting cows
Answer Multiple choice questions
• 1C
• Demand and price move in the opposite
directions and hence are inversely related. In
contrast, supply and price move in the same
direction, which means that they are directly
related.
• 2D
• A market supply curve shows the total amount
supplied at different prices.
Answer Multiple choice questions
• 3D
• An increase in supply results in a shift to the
right of the supply curve. A is a extension in
supply, B an contraction in supply and C a
decrease in supply.
• 4C
• A subsidy will provide an incentive for farmers
to produce more milk. A, B and D would
decrease supply.
 Four part question
A Define supply. (2)
B Explain why supply and price are positively related
(4)
C Analyse, using a supply diagram, the effect of an
improvement in the quantity of the training car
workers receive on the supply of cars (6)
D Discuss whether or not changes in demand or
changes in supply have a larger influence on the
market for tomatoes (8)
 Answer Four part question
A Supply is the willingness and ability to sell a
product.
B A rise in price will cause an extension in supply.
This positive relationship exists because a higher
price will provide firms with an incentive to
produce more of the product as they will gain a
higher profit. As well as making firms more willing
to supply the product, a higher price will also make
them better able to supply more as they will find it
easier to cover their costs of production.
 Answer Four part question
C An increase in the quality of training that car
workers receive should make them more
skilled and more productive. As workers will
be able to produce more cars in a given period
of time, the cost of producing each car will fall.
A lower cost of production will cause an
increase in supply as shown by the shift to the
right of the supply curve shown below.
Answer Four part question
 Answer Four part question
D The market for tomatoes is affected by both changes in demand
and changes in supply. Demand for tomatoes may increase if
incomes rise and people decide to use some of their higher
income on purchasing fresh fruit and vegetables. People may
also buy more tomatoes if the price of related products changes.
For example, people will buy more tomatoes if a substitute, such
as red peppers, rises in price or if a complement, such as bread
in the case of tomato sandwiches, falls in price. An increase in
population and a successful advertising campaign would result in
higher demand for tomatoes. In addition, a report stating that
eating tomatoes promotes good health would encourage people
to eat more tomatoes.
 Answer Four part question
Changes in supply may also affect the market for
tomatoes. An increase in costs of production or the
removal of a subsidy given to farmers who grow
tomatoes would cause supply to decrease Changes
in the price of other agricultural products
sometimes influence the supply of tomatoes. For
instance, if onions rise in price due to higher
demand, some farmers may decide to switch some
of their land from growing tomatoes to growing
onions.
 Answer Four part question
The main influence on the market for tomatoes in
some countries is changes in weather conditions.
Periods of bad weather and the outbreak of pests and
diseases can result in a significant reduction in the
supply of tomatoes, which can push up their price. The
spread of growing tomatoes in polytunnels and
greenhouses is, however, reducing the significance of
this influence and reducing seasonal fluctuations in
price. In the future, the main influence on the market
for tomatoes may be advances in the technology used
in tomato cultivation.