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Study Notes

1.2.4 Supply (Edexcel)


Last updated 19 Sept 2023

This Edexcel study note overs the theory of supply.

A) Distinction Between Movements Along a Supply Curve and Shifts of a Supply Curve

1. Movements Along a Supply Curve

  • Movements along a supply curve occur when the quantity supplied changes in response to a change in the price of the good or service, while other factors remain constant.
  • The law of supply states that, all else being equal, as the price of a good or service increases, the quantity supplied also increases, and vice versa.

2. Shifts of a Supply Curve

  • Shifts of a supply curve occur when factors other than price cause a change in the quantity supplied at every price level.
  • A shift indicates a change in overall supply, not just a response to price changes.

B) Factors That May Cause a Shift in the Supply Curve (Conditions of Supply)

1. Production Costs

  • Changes in the cost of inputs such as labor, raw materials, and energy can affect supply.
  • Example: A significant increase in the price of crude oil can increase production costs for many industries, affecting their supply.

2. Technological Advancements

  • Technological improvements can lower production costs and increase supply.
  • Example: Advancements in manufacturing technology have reduced the cost of producing consumer electronics, leading to increased supply and lower prices.

3. Government Policies and Regulations

  • Government policies, such as taxes, subsidies, and regulations, can impact supply.
  • Example: Subsidies to farmers may increase the supply of agricultural products, while strict environmental regulations may reduce the supply of certain industrial goods.

4. Natural Disasters and Weather Conditions

  • Natural disasters, like hurricanes or droughts, can disrupt production and reduce supply.
  • Example: A drought in a major wheat-producing region can reduce the supply of wheat, leading to higher prices.

5. Changes in Expectations

  • Producers may adjust their supply based on their expectations of future prices or market conditions.
  • Example: If farmers expect coffee prices to rise in the future, they may reduce current supply to take advantage of higher prices later.

6. Government Intervention in International Trade

  • Trade policies, such as tariffs and quotas, can affect the supply of imported goods.
  • Example: Imposing tariffs on steel imports can reduce the supply of foreign steel in the domestic market.

7. Natural Resource Availability

  • The availability of natural resources, like minerals and fossil fuels, can impact supply.
  • Example: Depletion of oil reserves can lead to a reduction in the supply of oil, affecting energy markets.

Understanding movements along and shifts of the supply curve, along with the conditions of supply, is essential for analyzing how changes in various factors can influence the quantity supplied of goods and services in the market. These concepts help economists and policymakers make predictions and design effective policies in response to changing market conditions.

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