Study Guide

Supply

IB Economics SLΒ· Unit 2: Competitive markets: demand and supplyΒ· 40 min read

1. Core Definitions and the Law of Supplyβ˜…β˜…β˜†β˜†β˜†β± 10 min

πŸ“˜ Definition

Supply

The quantity of a good or service that producers are willing and able to sell at every possible price in a given time period

Example:

A bakery is willing to sell 50 loaves of bread per day at $3, and 70 loaves at $4, which represents its supply of bread.

The law of supply describes the positive relationship between price and quantity supplied. This relationship arises because of increasing marginal costs of production: as a firm produces more output, each additional unit costs more to produce, so producers will only supply more units if they can charge a higher price.

Qs=a+bPQ_s = a + bP

Where = quantity supplied, = the price intercept, = positive slope, and = price of the good.

πŸ“ Worked Example

Given the supply function , calculate quantity supplied when .

  1. 1

    Substitute P = 10 into the supply function

  2. 2
    Qs=βˆ’20+5(10)Q_s = -20 + 5(10)
  3. 3

    Simplify to get the final quantity supplied

  4. 4
    Qs=βˆ’20+50=30Q_s = -20 + 50 = 30

2. Movements Along vs Shifts of the Supply Curveβ˜…β˜…β˜†β˜†β˜†β± 15 min

There is a critical difference between changes in quantity supplied and changes in supply:

  • Change in quantity supplied: Caused only by a change in the own price of the good. Results in a movement along the existing supply curve.

  • Change in supply: Caused by a change in any non-price determinant of supply. Results in a shift of the entire supply curve.

πŸ“ Worked Example

The price of apples increases. What type of change occurs to the supply of apples?

  1. 1

    Identify the source of change: the change is to the price of apples itself, not any external factor.

  2. 2

    Changes to the own price of the good only cause movements along the existing supply curve, not shifts.

  3. 3

    An increase in price causes an upward movement along the supply curve, increasing the quantity supplied of apples.

βœ“ Quick check

Test your understanding:

  1. Which of the following causes a shift of the supply curve for bread?

    • A: The price of bread increases

    • B: The cost of wheat flour for bread decreases

    Reveal answer
    B β€”

    The price of bread itself is an own-price change, which only causes a movement along the existing supply curve. Wheat cost is a non-price determinant, so it shifts the entire supply curve.

3. Non-Price Determinants of Supplyβ˜…β˜…β˜…β˜†β˜†β± 15 min

Any factor other than the own price of the good that affects producer costs or willingness to supply will shift the supply curve. Common tested determinants are:

  • Costs of factors of production (lower costs = right shift, higher costs = left shift)

  • Technology and productivity (improved technology = lower costs = right shift)

  • Number of firms in the market (more firms = greater total supply = right shift)

  • Government intervention (taxes increase costs = left shift; subsidies decrease costs = right shift)

  • Producer expectations of future prices (expected higher future prices = lower current supply = left shift)

πŸ“ Worked Example

The government introduces a $1 per kg subsidy on domestic wheat. How does this affect the supply curve for wheat?

  1. 1

    A subsidy lowers the per-unit production cost for wheat producers.

  2. 2

    Production costs are a non-price determinant of supply, so the entire supply curve shifts.

  3. 3

    Lower costs mean producers are willing to supply more wheat at every price, so supply increases and the supply curve shifts right.

Exam tip:

Always label your original supply curve S1 and shifted curve S2, and add an arrow to show the direction of the shift for full marks on diagram questions.

4. Producer Surplusβ˜…β˜…β˜…β˜†β˜†β± 10 min

πŸ“˜ Definition

Producer Surplus

Total net gain for producers from selling at the market price, equal to the difference between the price received and the minimum price producers were willing to accept. Graphically, it is the area below the market price and above the supply curve.

For a linear supply curve, producer surplus is calculated as the area of a triangle, since the supply curve is straight. The formula uses equilibrium quantity and the difference between market price and the price intercept of the supply curve.

πŸ“ Worked Example

Equilibrium for coffee is at P = $8, Q = 40. The supply curve intersects the price axis at P = $2. Calculate total producer surplus.

  1. 1

    Use the area of a triangle formula:

  2. 2

    Base = equilibrium quantity = 40, Height = market price - intercept = 8 - 2 = 6

  3. 3
    Producer Surplus=12Γ—40Γ—6=120\text{Producer Surplus} = \frac{1}{2} \times 40 \times 6 = 120

5. Common Pitfalls

Wrong move:

Calling an own-price change a shift of the supply curve, instead of a movement along

Why:

Examiners regularly test this distinction, and mixing it up loses easy marks on multiple choice and diagram questions

Correct move:

Remember: Own price change = movement along; any other change = shift of the entire curve

Wrong move:

Shifting supply left for a subsidy and right for a tax

Why:

Taxes increase production costs, while subsidies decrease them, leading to opposite shifts

Correct move:

Subsidy = lower cost = more supply = right shift; Tax = higher cost = less supply = left shift

Wrong move:

Calculating producer surplus using only market price as height, not subtracting the intercept

Why:

The surplus is only the difference between what producers receive and their minimum acceptable price, not the entire price

Correct move:

Always calculate height as market price minus the supply curve's price intercept

Wrong move:

Assuming new technology shifts supply left because it reduces the number of workers needed

Why:

Even if technology replaces workers, it lowers per-unit production costs overall, which increases supply

Correct move:

Productivity-improving technology always shifts the supply curve to the right

6. Quick Reference Cheatsheet

Change

Cause

Supply Curve Change

Change in quantity supplied

Own price change

Movement along existing curve

Change in supply

Non-price determinant change

Shift of entire curve

Lower input costs

Factor price change

Right shift (increase supply)

Higher input costs

Factor price change

Left shift (decrease supply)

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When this came up on past exams

AI-estimated based on syllabus patterns β€” cross-check with official past papers for accuracy. Use only as revision-focus signals.

  • 2022 Β· 1

    Shift of supply multiple choice

  • 2023 Β· 2

    Determinants of supply 10 mark question

  • 2024 Β· 1

    Calculate producer surplus

What's Next

Supply is a core foundational concept for all microeconomic analysis. It pairs with demand to determine market equilibrium, where we explore how prices and quantities are set in competitive markets, and how changes in supply or demand affect market outcomes. Understanding supply is also required to analyze the impact of government interventions like taxes and subsidies, and to calculate how welfare is distributed between consumers and producers through consumer and producer surplus. Mastering this distinction between shifts and movements now will prevent common errors on all future microeconomics questions.