What you'll learn
- What economists mean by supply and quantity supplied.
- Why firms usually supply more when the market price rises.
- The main factors that can increase or decrease supply.
- How to draw a firm’s supply curve from production data, and tell a movement along from a shift.
3.1.3.2 Supply for goods and services
Before supply and demand can be combined to determine prices, you need to understand the producer’s side of the market.
A producer is a person or business that makes goods or provides services. A good is a physical product, such as bread, petrol or a phone. A service is something useful done for someone, such as a haircut, bus journey or Netflix subscription.
What is supply?
Supply
Supply is the amount of a good or service that producers are willing and able to sell at different prices over a period of time.
The phrase willing and able matters. A firm might be willing to sell 1,000 pizzas, but if it has only enough staff and ovens to make 400, it cannot supply 1,000. Equally, it might be able to sell more, but choose not to if the price is too low to cover its costs.
Quantity supplied
Quantity supplied is the amount producers are willing and able to sell at one particular price.
So, supply is the whole relationship between price and quantity supplied. Quantity supplied is one point on that relationship.
Supply is not just stock
In Economics, supply does not simply mean “how much is sitting in a warehouse”. It means how much producers are prepared and able to sell at different prices.
Why does the supply curve usually slope upwards?
A supply curve is a line on a graph showing how much of a good or service producers are willing and able to sell at different prices.
Most supply curves slope upwards from left to right. This shows the law of supply: as price rises, the quantity supplied usually rises.
Why? Higher prices give firms a stronger incentive to produce because they can earn more revenue. Higher prices may also make it worthwhile to use extra workers, extra machinery, overtime or more expensive inputs.
Profit incentive
The profit incentive is the motivation for firms to increase output because selling at a higher price can increase profit. Profit is total revenue minus total costs.
Explaining why a bakery supplies more
A bakery sells sausage rolls. At £1.20 each, it supplies 300 per day. At £1.80 each, it supplies 500 per day.
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The price of the bakery’s own product has risen from £1.20 to £1.80, so selling each sausage roll now brings in more revenue.
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The higher price makes extra production more worthwhile, even if the bakery has to pay staff overtime or use more ingredients.
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The quantity supplied rises from 300 to 500 per day, so there is an extension of supply along the existing supply curve.
The factors which influence supply
The supply of a good or service is affected by anything that changes how profitable or possible it is for firms to produce.
1. The price of the good or service itself
If the price of the product rises, firms usually supply more. If the price falls, firms usually supply less.
This causes a movement along the supply curve, not a shift of the whole curve.
2. Costs of production
Costs of production are the costs firms face when making goods or providing services. These include wages, rent, raw materials, energy, packaging and transport.
If costs rise, supply usually falls because production becomes less profitable. If costs fall, supply usually rises.
A UK example is the 2022–23 energy price shock. Many bakeries, takeaways and manufacturers faced much higher gas and electricity bills, making it more expensive to produce.
3. Technology and productivity
Technology means the tools, machinery, software or methods used in production. Better technology can increase supply by making workers more productive or reducing waste.
For example, a supermarket using improved stock-control software may supply shelves more reliably because it can predict demand and avoid shortages.
4. Taxes and subsidies
An indirect tax is a tax placed on spending or production, such as VAT or a tax on certain goods. It raises costs for firms, so it can reduce supply.
A subsidy is financial support from the government to producers. It lowers costs, so it can increase supply.
For example, support for renewable energy production can encourage firms to supply more low-carbon electricity.
5. Number of firms in the market
If more firms enter a market, total market supply rises. If firms leave, total market supply falls.
For example, if more independent coffee shops open in a town, the market supply of coffee increases.
6. External shocks, weather and supply chains
An external shock is an unexpected event outside the firm’s control. COVID-19 disrupted global shipping and factory production, reducing supply in some markets. Bad weather can reduce the supply of crops. Brexit changed some trading arrangements and labour availability, affecting supply in certain UK industries.
7. Expectations of future prices
If firms expect prices to rise in the future, they may hold back stock now, reducing current supply. This works best for goods that can be stored, such as oil or metals.
Not everything can be stored
For services and perishable goods, such as haircuts, hotel rooms or fresh strawberries, firms cannot easily “save” today’s supply for later.
8. Moral, ethical and sustainability considerations
Sometimes firms choose supply decisions that are not just about short-term profit. A clothing business might use more ethical suppliers, pay higher wages or reduce pollution. This may increase costs and reduce supply in the short run, but it can protect workers, reduce environmental harm and improve the firm’s reputation.
Costs matter
Anything that makes production cheaper or easier usually increases supply. Anything that makes production more expensive or difficult usually decreases supply.
Causes of changes in supply
A change in supply means the whole supply curve shifts. At every price, producers are now willing and able to sell more or less than before.
An increase in supply shifts the supply curve to the right. A decrease in supply shifts it to the left.
This diagram compares a movement along the supply curve with shifts of the whole curve.
Movements along the supply curve
A movement along the supply curve happens when the price of the good itself changes.
- A price rise causes an extension of supply: quantity supplied increases.
- A price fall causes a contraction of supply: quantity supplied decreases.
Shifts of the supply curve
A shift happens when a non-price factor changes, such as costs, technology, taxes, subsidies or weather.
Price changes do not shift supply
If the market price of the product changes, move along the supply curve. Do not draw a new curve unless something other than the product’s own price has changed.
Classifying supply changes
A crisp manufacturer faces two changes: the market price of crisps rises, and the cost of potatoes rises after poor weather.
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The rise in the price of crisps affects the firm’s own selling price, so this causes an extension of supply along the existing supply curve.
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The rise in potato costs makes production more expensive at every price, so this causes a decrease in supply.
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The decrease in supply is shown by shifting the supply curve left, because the firm will supply fewer crisps at each possible price.
How to construct an individual firm’s supply curve from production data
An individual firm’s supply curve shows how much one firm is willing and able to supply at different prices.
You may be given a table of production data. Your job is to plot the points accurately and join them to show the supply relationship.
Imagine a small sandwich business has this data:
| Price per sandwich | Quantity supplied per day |
|---|---|
| £1 | 20 |
| £2 | 50 |
| £3 | 90 |
| £4 | 130 |
| £5 | 160 |
To construct the curve:
- Put price on the vertical axis.
- Put quantity supplied on the horizontal axis.
- Plot each price and quantity pair.
- Join the points with a line or smooth curve.
- Label the curve S for supply.
Remember the axes
For supply and demand diagrams, price goes up the side and quantity goes along the bottom.
Constructing a firm’s supply curve
Using the sandwich business data above:
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Choose suitable axis scales: the vertical axis needs to go from £0 to at least £5, and the horizontal axis needs to go from 0 to at least 160 sandwiches.
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Plot each coordinate using quantity first and price second: 20 sandwiches at £1, 50 at £2, 90 at £3, 130 at £4, and 160 at £5.
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Join the points in order and label the line S, because the line shows the firm’s supply at different prices.
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Check the direction: the line slopes upwards, showing that as price rises from £1 to £5, quantity supplied rises from 20 to 160 sandwiches per day.
Reading a supply curve
Once the curve is drawn, you can use it to read off the quantity supplied at a given price.
For example, if the graph shows that at £3 the firm supplies 90 sandwiches per day, then 90 is the quantity supplied at that price.
If the price rises to £4 and quantity supplied rises to 130 sandwiches, the change in quantity supplied is:
£130? No — be careful. Quantity is measured in sandwiches, not pounds.
130 sandwiches − 90 sandwiches = 40 more sandwiches per day.
Mixing up units
Price is measured in £, but quantity supplied is measured in units of the good or service, such as sandwiches per day, haircuts per week or train journeys per month.
Bringing it together
Supply is the producer side of the market. Firms respond to prices, but they are also affected by real-world pressures such as energy bills, wages, technology, taxes, weather and supply-chain disruption.
In GCSE Economics, the big skill is to decide whether an event causes:
- a movement along the supply curve, because the product’s own price changed; or
- a shift of the supply curve, because a non-price factor changed.
In the exam
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If you see a change in the good’s own price, explain a movement along the supply curve: extension if price rises, contraction if price falls.
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If you see costs, technology, tax, subsidy, weather, supply chains or number of firms changing, explain a shift of supply and state the direction.
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When drawing a supply curve, label both axes, use accurate scales, plot points carefully, and label the curve S.
Check yourself
- What is the difference between supply and quantity supplied?
- Why would a rise in energy costs shift a firm’s supply curve to the left?
- A firm supplies more because the market price has risen. Is this a shift of supply or a movement along the curve?
