Supply Q: Why is advice so cheap? A: Because supply always exceeds demand.

1.2.2 Supply - syllabus Candidates should be able to: Define supply Explain how a change in price causes a movement along a supply curve Assess factors which may cause a shift in supply (changes in the cost of production, introduction of new technology, indirect taxes, government subsidies and external shocks).

Definition of actual and planned supply What is supply? It is the amount of goods or services ____________ plan to offer for sale at each given price level. Planned supply may be different from actual supply (realised supply) because if consumers do not want to buy as much as producers are prepared to sell then producers will limit their output.

The theory of supply In theory, at higher prices a larger quantity will generally be supplied than at lower prices, ceteris paribus, and at lower prices a smaller quantity will generally be supplied than at higher prices, ceteris paribus. So we have higher supply at higher prices and vice versa. Again, it is important to assume that ‘all other things remain constant’.

What does the supply show? The supply curve shows the relationship between the amount offered for sale and the price. What is the main objective of firms? So what can they gain as prices rise if they increase their supply?

Why is the supply curve upward sloping? Firms will make ______ profits as the price per unit sold increases. So as the prices increase it is in the firm’s interests to make _______ When prices rise this sends a signal to firms that there is a shortage and it creates an incentive to them to increase supply. So the supply curve slopes upwards as higher prices provide an incentive for firms to produce more.

Movement along a supply curve Movements along the supply curve are caused by changes in price. This is called an extension in supply when the quantity supplied increases as the price increases. A contraction in supply is when the reverse happens; as price falls the quantity supplied falls.

What happens to the supply curve if factors OTHER than price change? If something happens that increases a firm’s costs regardless of the price level (e.g. an increase in taxes or an increase in materials or wages), then the firm’s supply curve will shift to the ______ This is because if costs were higher but prices remained the same then firms would make ______ profit and so some would ________ production.

Supply and lower costs Similarly if something happens that decreases a firm’s costs (e.g. a subsidy from the government) then the firm’s supply curve shifts to the right. Why?

What factors shift the supply curve?

Changes in income and supply Shifting the supply curve NOTE – if incomes change this will shift demand but not supply. A change in demand will cause a movement along the supply curve not a shift. So changes in income (e.g. increased economic growth) or increased demand for certain goods will NOT SHIFT the supply curve as they won’t affect the costs for firms.

Physical constraints Between January 2004 and August 2008, the price of copper rose from $2,500 to $8,000 a tonne. Why did firms not produce more copper?