The supply curve slopes up for three reasons
Definition
Law of supply: the rule that price and quantity supplied move in the same direction, other things being equal.
- A higher price raises the profit on every unit, so firms already in the market find it worth producing more.
- Producing extra output usually costs more per unit, through overtime, older machines or dearer materials, and only a higher price covers that.
- A higher price also draws new firms into the market, because it makes production worthwhile for producers who could not cover their costs before.
- All three push the same way, which is why price and quantity supplied move in the same direction and the curve rises.
Every point pairs one price with one quantity
- Read the curve by going across from a price on the vertical axis to the line, then down to the quantity supplied.
- That pair describes one selling plan, and the whole line describes what the firm would do at every price.
- Two points on the same curve therefore answer what would happen at a different price with costs and technology unchanged.
Example
- Using the market schedule from 2.3.2, read the effect of a price rise from 30p to 35p a litre.
| Price per litre | Market supply |
|---|---|
| 25p | 2,000 |
| 30p | 3,000 |
| 35p | 4,000 |
| 40p | 4,900 |
Step 1: read the quantity at each price, which is 3,000 litres at 30p and 4,000 litres at 35p.
Step 2: subtract to find the change:
4,000−3,000=1,000 litres a day 4{,}000 - 3{,}000 = 1{,}000\text{ litres a day} 4,000−3,000=1,000 litres a day- A 5p rise brings out 1,000 more litres a day, and both figures come from the same curve because only price has changed.
Market supply is what settles a price
- A single farm's decision changes almost nothing, but the same decision taken across a whole market moves the quantity available.
- The market curve is the one drawn against demand when a price is being explained, as in 2.4.3.
- Individual supply still matters for explaining why the market curve rises, because the market total is built from firms' own profit decisions.
Explaining data means saying what the numbers mean
- Quote the figures from the table rather than saying that supply went up.
- Give the direction and then the size, so a 5p rise bringing out 1,000 extra litres a day is stated in full.
- Name the relationship at the end, which is that price and quantity supplied moved in the same direction.
Exam technique
- Give a reason the curve slopes up rather than restating that it does, because the reason is what carries the marks.
- Say that costs and technology are held constant when you explain a movement, since that is what makes it a movement rather than a shift.
Self review
- State the law of supply.
- Give two reasons a supply curve slopes upwards.
- Using the market schedule, how many litres a day are supplied at 40p?
- How do you read a quantity supplied off a supply curve?
- Why does a higher price bring new firms into a market?
