Market Supply

Supply notes

1. Theory'of'Market'Supply'
EdExcel'Economics'1.2.4'

2. Market'Supply'
• Supply'is'the'quan9ty'of'a'
good'or'service'that'a'
producer'is'willing'and'able'
to'supply'onto'the'market'at'
a'given'price'in'a'given'9me'
period.'
• The'basic'law'of'supply'is'
that'as'the'price'of'a'product'
rises,'so'businesses'expand'
supply'to'the'market.''
• A'supply'curve'shows'a'
rela9onship'between'market'
price'and'how'much'a'firm'is'
willing'and'able'to'sell.'
Mass'Produc9on'Airline'Travel'
Produc9on'Lines'
Key'to'understanding'the'basics'of'market'
supply'is'to'be'aware'of'the'importance'of'
the'profit'mo<ve.'Suppliers'will'be'looking'
to'get'the'best'price'for'their'product.'

3. Reasoning'for'the'Law'of'Supply'
• There'are'three'main'reasons'why'supply'curves'are'drawn'as'
sloping'upwards'from'leI'to'right':'
1. The'profit'mo<ve:''
– If'the'market'price'rises'following'an'increase'in'demand,'it'
becomes'more'profitable'for'businesses'to'increase'their'
output'
2. Produc<on'and'costs:''
– When'output'expands,'a'firm’s'produc<on'costs'tend'to'rise,'
therefore'a'higher'price'is'needed'to'cover'these'extra'costs'of'
produc9on.'This'may'be'due'to'the'effects'of'diminishing'
returns'as'more'factor'inputs'are'added'to'produc9on.'
3. New'entrants'coming'into'the'market:''
– Higher'prices'may'create'an'incen<ve'for'other'businesses'to'
enter'a'market'leading'to'an'increase'in'total'supply.'

4. Supply'in'Ac<on'–'Adidas'Footwear'Output'
Adidas Group's footwear production worldwide from 2008 to 2014
221'
171'
219'
239' 240'
256' 258'
0'
50'
100'
150'
200'
250'
300'
2008' 2009' 2010' 2011' 2012' 2013' 2014'
Million'pairs'
Year'
In'2009'there'was'a'global'economic'recession.'Demand'for'
sports'shoes'declined'and'Adidas'responded'by'cuYng'output'

5. Supply'Curve'–'Higher'Prices'and'Supply'Expansion'
Price'of'
Coffee'
Quan9ty'supplied'
Supply'of'coffee'
P1'
Q1'
P2'
Q2'
P3'
Q3'
A'rise'in'the'market'price'brings'about'an'expansion'of'supply'
–'producers'are'responding'to'the'profit'mo<ve'
A'movement'along'the'
supply'curve'is'caused'
solely'by'a'change'in'
price,'all'other'factors'
remaining'constant'

6. Supply'Curve'–'Lower'Prices'and'Supply'Contrac<on'
Price'of'
Coffee'
Quan9ty'supplied'
Supply'of'coffee'
P1'
Q1'
P2'
Q2'
P3'
Q3'
If'market'prices'fall,'we'expect'to'see'a'contrac<on'of'supply'
and'producers'have'less'incen9ve'to'produce'at'lower'prices'
In'some'industries,'the'
price'may'fall'so'low'
that'some'suppliers'
decide'to'leave''

7. Market'Supply'
Market'supply'is'total'supply'brought'to'the'market'by'producers'at'
each'price.'To'calculate,'sum'the'individual'supply'schedules'
Price'(£)'
Firm'A’s'
supply'+'
Firm'B’s'
supply'+'
Firm'C’s'
supply'+'
='Market'
Supply'
10' 30' 0' 5' 35'
20' 45' 10' 15' 70'
30' 65' 20' 40' 125'
40' 100' 30' 70' 200'
Supply'is'not'necessarily'the'amount'that'is'actually'sold,'since,'if'
consumers'do'not'wish'to'buy'the'product,'it'will'remain'unsold'

8. Causes'of'ShiXs'in'the'Market'Supply'Curve'
1. Changes'in'the'unit'costs'of'produc<on'
– Lower'unit'costs'mean'that'a'business'can'supply'more'at'each'
price'–'for'example'higher'produc9vity'
– Higher'unit'costs'cause'an'inward'shiI'of'supply'e.g.'a'rise'in'wage'
rates'or'an'increase'in'energy'prices'/'other'raw'materials'
2. A'fall'(deprecia<on)'in'the'exchange'rate'causes'an'increase'in'prices'
of'imported'components'and'raw'materials'–''
3. Advances'in'produc<on'technologies'–'outward'shiI'of'supply'
4. The'entry'of'new'producers'into'the'market'–'outward'shiI'
5. Favourable'weather'condi<ons'e.g.'for'agricultural'products'
6. Taxes,'subsidies'and'government'regula<ons'
– Indirect'taxes'cause'an'inward'shiI'of'supply'
– Subsidies'cause'an'outward'shiI'of'supply'
– Regula<ons'increase'costs'–'causing'an'inward'shiI'of'supply'

9. Illustra<ng'An'Outward'ShiX'in'Market'Supply'
Price'of'Beef'
Quan9ty'supplied'
S1'
P1'
Q1' Q2'
An'outward'shiI'of'the'market'supply'for'beef'is'shown'by'S1'
shiIing'to'S2.'More'can'be'supplied'at'each'price'level'
S2'
The'supply'curve'
will'shiI'if'there'is'
a'change'in'a'non]
price'factor,'which'
affects'producers'

10. Illustra<ng'An'Inward'ShiX'in'Market'Supply'
Price'of'Beef'
Quan9ty'supplied'
S1'
P1'
Q1'Q3'
An'inward'shiI'of'the'market'supply'curve'means'that'
producers'cannot'supply'as'much'at'each'price'level'
S3'
The'main'cause'of'an'inward'
shiI'of'supply'will'be'an'
increase'in'produc<on'costs.'
How'much'the'supply'curve'
shiIs'depends'on'how'
important'a'par9cular'cost'is'
to'a'business'e.g.'the'
percentage'of'labour'costs'in'
a'firm’s'total'costs.'

11. Wheat'Prices'affect'Supply'Costs'in'many'Industries'
Source:'DEFRA'*'data'for'May'2015'
65.02'
79.32'80.3'
67.43'
78.88'
120.97'
137.87'
107.05'
123.76'
169.17'
179.26'
175.95'
143.06'
127.15'
0'
20'
40'
60'
80'
100'
120'
140'
160'
180'
200'
2002'2003'2004'2005'2006'2007'2008'2009'2010'2011'2012'2013'2014'2015*'
Price'per'tonne'in'£s'
Falling'wheat'prices'will'cause'a'reduc9on'in'the'resource'costs'for'food'
manufacturers'such'as'cereal'producers.'If'other'factors'remain'
constant,'producers'who'use'wheat'will'see'an'outward'shiI'of'supply'

12. Joint'Supply'
• Joint'supply'is'where'an'
increase'or'decrease'in'the'
supply'of'one'good'leads'to'an'
increase'or'decrease'in'supply'
of'a'by]product.''
• Examples:'
1. An'expansion'in'beef'
produc9on'will'lead'to'a'rising'
market'supply'of'beef'hides'
2. A'contrac9on'in'the'market'
supply'of'lamb'will'reduce'the'
supply'of'wool'
• Another'example'of'joint'
supply'is'wheat'and'straw'
Beef'and''hide'Lamb'and'wool'
Wheat'and'
straw'
Codon'and'
codon'seed'
Examples'of'joint'supply'

13. Theory'of'Market'Supply'
EdExcel'Economics'1.2.4'