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Study Notes

Market Supply

Level:
AS, A-Level
Board:
Edexcel, OCR, IB

Last updated 22 Mar 2021

Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.

The Basic Law of Supply

The basic law of supply is that as the selling price of a product rises, so businesses expand supply to the market. The higher selling price acts as an incentive for businesses to produce more – and it may also attract other suppliers into the market.

This is illustrated in the diagram below:

Causes of Changes in Market Supply

The four main causes of changes in the amount supplied to a market are:

  • Costs of Production
  • External Shocks
  • New Technology
  • Taxation & Subsidies

Let’s look briefly at each of these

Supply and Costs of Production

It stands to reason that the costs of producing output will influence how much a business is able to supply:

  • Lower unit costs mean that a business can supply more at each price – for example through higher productivity
  • Higher unit costs cause an inward shift of supply e.g. a rise in wage rates or an increase in energy prices / other raw materials

For example, consider businesses that makes food products that contain a substantial amount of wheat. Falling wheat prices will cause a reduction in the resource costs for food manufacturers such as cereal producers. If other factors remain constant, producers who use wheat will be able to supply more for the same cost.

Supply and External Shocks

Significant and often unexpected changes in the external business environment usually impact on market supply.

For example, the sharp and sustained economic downturn between 2008-2012 across the world’s developed economies led to many firms cutting back the scale of their operations, including cutting production capacity.

The chart below shows how in 2009 (during the global economic recession) demand for sports shoes declined and Adidas responded by cutting output.

Supply and New Technology

Technological change encourages new entrants to a market (increasing supply) and can also enable existing suppliers to become more efficient, thereby increasing their potential to supply.

A good example is the 3D printing industry where the rapid development of additive manufacturing techniques has led to an explosion in supply of and demand for 3D printers.

Supply and Taxation

Changes in taxation can affect both supply and demand.

For example, the provision of subsidies to households and businesses installing solar panels in recent years encouraged a substantial increase in supply to the market.

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