Supply
Economics: IB Diploma, topic 1.1.3
The Supply Curve
The supply curve shows the relationship between price (on the vertical axis) and quantity (shown on the horizontal axis).
Incentive to expand production
- When a firm's profits increase, it is incentivised to produce more output. This is because the more it produces, the more profit it will earn.
- So, when costs of production fall, a firm will be incentivised to supply a higher quantity at a given price.
- This is shown by a rightward shift in the supply curve.
- Subsidies can lower a firms average cost per unit, encouraging them to expand production also.
Causes of supply curve shifts
- Changes in the price of inputs (these will affect the cost of production).
- A discovery of a new technology (allowing the firm to produce at a lower cost).
- Changes in Government policy.
- E.g taxes, regulations and subsidies.
Effect of tax on supply
- The U.S. government imposes a tax on alcoholic drinks that collects eight billion dollars per year from producers.
- Taxes are treated as a cost by businesses.
- Higher costs decrease supply.
- So taxes decrease supply.
Factors Determining the Supply of Goods and Services
There are several factors that affect the supply of goods and services in an economy, including the price of a good.
Price of the good
- A rise in price will almost always lead to an increase in the quantity supplied of that good or service. This is also called an extension in supply.
- This is because the increase in price incentivises the firm to increase output.
- Economists call this positive relationship 'the law of supply'.
Technology and production
- A reduction in the costs of production will lead to an increase in supply because producer profits have risen.
- Technological improvements can increase the efficiency of the productive process.
- This will reduce the costs of production, shifting supply to the right.
Productivity and tax
- Increases in productivity means the output per input of a factor of supply increases, so supply shifts right.
- An indirect tax on supply raises the overall cost of production, shifting supply left.
Test yourself on Supply
Suppose the government increases the maximum amount of pollution a firm can make. What will happen to the supply curve?
What does a supply curve show?
What is happening to supply in this diagram?
A firm pays their workers to get extra training.
How would we expect this to affect the supply curve?