1. Determinants of Supply
Aims:
The nature of supply
The relationship between price and supply
Market supply
Causes of shifts in the supply curve

2. The Law of Supply
Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period
The basic law of supply is that as the market price of a commodity rises, so producers expand their supply onto the market
A supply curve shows a relationship between price and quantity a firm is willing and able to sell

3. The Supply Curve
Price
Quantity
Supply P1 Q1 P2 Q2 Q3 P3
An increase in price will cause an EXPANSION in Supply.
A fall in price will cause a CONTRACTION in Supply.

4. Explaining the supply decision
The “quantity supplied” is the amount sellers are willing and able to offer for sale at a single price
The change in the price of the good itself causes a movement ALONG the supply curve
Supply curves normally slope upward. Why?
Rising prices act as an incentive for producers to expand output – potential for higher profits
Increased output may lead to higher costs of production
But not all economists accept this convention (A2 theory)
Increased output might lead to lower costs per unit (known as economies of scale)

5. An outward shift in the Supply Curve
Price S1 S2 P1
Changes in any of the factors other than price cause a shift in the supply curve
A shift in supply to the left – the amount that producers offer for sale at every price will be less
A shift in supply to the right – the amount producers wish to sell at every price increases Q1 Q2
Quantity

6. An inward shift in the Supply Curve
Price S3 S1 S2 P1 Q3 Q1 Q2
Quantity

7. Causes of shifts in market supply
Changes in production costs
Wages,raw materials and components, energy, rents, interest rates
Government taxes and subsidies
Changes in technology – ICT can reduce long term costs but are expensive in SR
Changes in the number of producers in the market
Expectation of future price changes
Climatic conditions (important mainly for agricultural supply)

8. Shifts in the Supply curve…
What would cause the supply of butter to rise?
Reduction in costs of producing – e.g. nitrogen fertiliser = more used by farmers = better grass = more milk
Better technology in producing butter
More govt subsidies to farmers
Increase in profitability of skimmed milk ….. Because butter and cream products are jointly produced with skimmed milk.
Weather conditions favourable for favourable grass yield.
Pause for mini exercise – cut out strips for you to select!

9. More examples of shifts in supply – Mini exercise 1
What reasons might be given for the supply of potatoes to fall?
For what reasons might the supply of leather rise?
What reasons might be given for the supply of cod to fall?
For what reasons might the number of plumbers grow?
What reasons might be given for the number of teachers to fall?
What reasons might there be for the number of new houses being built rise?

10. Quantity Supplied (Qs)
The Supply Curve
Price
The supply curve shows the quantity of a product that a supplier is willing and able to sell at a given price in a given time period
There is usually a positive relationship between price and quantity supplied
Supply (S) P1
Quantity Supplied (Qs)

11. Quantity Supplied (Qs)
The Supply Curve
Price
An increase in market price causes an expansion of quantity supplied as producers respond to the incentive of higher prices and higher potential profits.
An expansion of supply S1 P2 P1
Quantity Supplied (Qs)

12. The Supply Curve
Price
A lower market price will lead to a contraction in total output S1 P1 P2
A contraction of supply
Quantity Supplied (Qs)

13. An Outward Shift in the Supply Curve
Price
Shifts in the supply curve mean that more or less will be supplied onto the market at each price level S1 S2 P1
Quantity Supplied (Qs)

14. An Inward Shift in the Supply Curve
Price
A fall in supply means that less is supplied onto the market at each price S3 S1 P1
Quantity Supplied (Qs)

15. So get your whiteboards ready….
Write on one side
MOVEMENT ALONG
On the other
SHIFT
Your Go
Remember that PRICE = contraction or expansion
All other factors = SHIFT inwards or outwards…

16. Mini exercise 2…. New oil fields starts up in production
In each case BE PREPARED TO EXPLAIN
Whether THE move along the supply curve is a contraction or expansion
Or whether THE shift in the supply curve is to the left or right
Mini exercise 2….
New oil fields starts up in production
The demand for central heating rises
The price of gas falls
Oil companies anticipate a surge in demand for central heating oil
The demand for petrol rises
New technology decreases the cost of oil refining
All oil products become more expensive.

17. Supply images
…. The milk market!

18. The supply of milk

19. The milk supply chain

20. Factors affecting the market supply of milk
The price of raw milk from farmers
Productivity in milk industry
The number of suppliers in the industry
Costs of packaging and transportation
Government subsidies to milk producers

21. Can ewe think of examples of joint supply?
Two products are in joint supply when a rise in the output of one product leads to a rise in the supply of the other product
Can ewe think of examples of joint supply?

22. Diagram to show joint supply
Two products are in joint supply when a rise in the output of one product leads to a rise in the supply of the other product
S Beef
Price
Price
S Beef hide P2 S1 P1 P3 P4 D1 D D Q1 Q2 Qa Qb Qc
Quantity bought and sold
Quantity bought and sold