DP Economics HL 2.2 Supply

DP Economics HL 2.2 Supply - Full notes

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DP Economics HL | 2.2 Supply

DP ECONOMICS · UNIT 2: MICROECONOMICS

2.2

Supply

Full notes for HL · IB-style

Contents

1	Producers and the meaning of supply
2	Supply schedules, supply curves and market supply
3	The law of supply: why supply curves slope upward
4	Movements along the supply curve and shifts of the curve
5	The non-price determinants of supply
6	Supply in the real world: two case studies
7	Diminishing marginal returns and marginal cost (HL only)
8	Linear supply functions (HL only)
9	Supply and time periods
10	Market supply from individual supply
11	The law of supply explained
12	Diminishing marginal returns
13	Non-price determinants of supply: applied
14	Joint and competitive supply
15	Expectations and supply
16	Producer surplus (introduction)
17	Movement along versus shift of supply
18	Supply in agricultural markets
19	Supply of services
20	Mixed review: worked problems
21	Additional exam-style practice
22	Supply and sustainability
23	Common misconceptions and links
24	Exam-style question with markscheme
25	Check your understanding
26	Summary and topic map

These are full teaching notes. Read each section in order, try the Think about it question before you read on, and do every Quick check before moving to the next section.

Before you start

Rate yourself on each statement now, and again after you've worked through the notes. Shade R (not yet), A (getting there) or G (confident).

I can…	R	A	G
explain what supply means and why it must be 'willing and able'
build a supply schedule and draw a correctly labelled supply curve
derive market supply from individual firms' supply
state the law of supply and explain why supply curves slope upward
distinguish a movement along the supply curve from a shift, using the correct language
explain each non-price determinant of supply with a diagram and a real example
explain the effect of indirect taxes and subsidies on supply
explain the law of diminishing marginal returns and its link to rising marginal cost
use a linear supply function Qs = c + dP and interpret c and d

Sections 7 and 8 are Additional Higher Level content. Every other section is common to SL and HL.

Guiding questions

Why do firms offer more for sale when prices rise? What can make firms supply more or less even when the price has not changed?

How this topic is examined

Supply is the second half of the market model. Almost every market question asks you to decide whether demand, supply or both have shifted, so you must be able to identify supply-side changes quickly and draw them correctly.

In Paper 2 you will see short questions asking for definitions and diagrams of supply shifts, often linked to cost changes, taxes, subsidies or weather in a real market. In Paper 3 you will use linear supply functions to calculate quantities and to show the effect of a tax or subsidy on the function.

Command term	What the examiner wants
Define	the precise meaning, ideally in the IB wording, in one or two sentences
Draw / Sketch	a fully labelled diagram with every axis, curve, equilibrium and change labelled
Explain	a causal chain linked to economic theory, usually supported by a diagram
Analyse	break a situation into its parts and trace the effects of each
Evaluate / Discuss	weigh up arguments, question assumptions and reach a justified conclusion using real-world examples
Calculate	substitute correctly into the supply function, show each step, and give units

How to use these notes

Each section teaches one part of the syllabus in full. You'll see these boxes throughout; each has one job:

Box	What it's for
Think about it	a question to get you thinking before a section; the answer comes in the section
Key point	the one idea you must not forget
Common mistake	an error examiners see every year, and how to avoid it
In the real world	where the economics shows up outside the classroom
Try this	something quick you can do yourself to test the idea
Worked example	full solutions with IB-style marks (M1 method, A1 answer, R1 reasoning)
Quick check	short questions to test yourself at the end of each section

1 Producers and the meaning of supply

Supply is what producers are willing and able to sell, at each price, over a period of time.

Think about it

A farmer has 100 tonnes of mangoes in storage. If the price falls very low, will she sell all of them anyway? What else could she do?

In 2.1 you studied the buyers in a market. Now we turn to the sellers: the producers or firms who make goods and services available. Producers range from a single street vendor to multinational companies, and they all face the same basic decision: how much to offer for sale at each price.

Supply is the quantity of a good or service that producers are willing and able to supply at each possible price, during a particular time period, ceteris paribus. As with demand, every part of the definition matters.

Willing and able. A producer must want to sell (willing) and must have the resources to produce the good (able). A firm might be willing to sell 10 000 cars a month at a high price, but if its factory can only make 4 000, it is not able, and only 4 000 count as supply.

At each possible price. Supply is the whole relationship between price and the quantity offered. The quantity offered at one particular price is the quantity supplied.

In a given time period, and ceteris paribus: as with demand, supply is measured per period, and the supply curve holds constant everything except the good's own price, such as the costs of production, technology, taxes and the number of firms.

Term	Meaning
Supply	the quantity producers are willing and able to supply at each possible price, in a given period, ceteris paribus
Quantity supplied	the amount supplied at one particular price
Supply schedule	a table of quantity supplied at each price
Supply curve	a graph of the schedule, sloping upward from left to right
Market supply	the sum of all firms' supply at each price

Key point

Supply is the whole curve; quantity supplied is one point on it. Exactly as with demand, mixing the two words leads to circular reasoning.

Quick check

1. Define supply.

2. Why must a producer be 'able' as well as 'willing'?

3. What is the difference between supply and quantity supplied?

Answers: 1. quantity producers are willing and able to supply at each price, in a period, ceteris paribus 2. it needs the resources to produce 3. the whole curve vs one point

2 Supply schedules, supply curves and market supply

A supply schedule is a firm's plan. Add every firm's plan and you get market supply.

Think about it

A bakery and a supermarket both sell bread. If the price of a loaf doubles, which do you think could increase its output faster, and why?

A supply schedule lists the quantity a firm would supply at each price. The table shows the weekly supply of loaves by two bakeries. At $1 Bakery A supplies nothing because the price does not cover its costs; at $5 it supplies 40 loaves. Bakery B supplies a little at every price.

The supply curve plots the schedule with price on the vertical axis and quantity on the horizontal axis, as always. For most goods it slopes upward from left to right: the higher the price, the more is supplied.

Price ($)	Bakery A	Bakery B	Market supply
1	0	5	5
2	10	10	20
3	20	15	35
4	30	20	50
5	40	25	65

Figure 1. Individual supply curves and the market supply curve.

Market supply is found exactly as market demand was: add the quantities supplied by all firms at each price (horizontal summation). At $3, Bakery A supplies 20 and Bakery B supplies 15, so market supply is 35. More firms in the market means more quantity at every price, so the market supply curve shifts right when firms enter and left when they leave.

WORKED EXAMPLE 1 Building market supply

A third bakery joins the market and supplies 2, 4, 6, 8 and 10 loaves at prices of $1 to $5. (a) Find market quantity supplied at $4. (b) Explain the effect on the market supply curve.

Solution

(a) At $4: Bakery A 30, Bakery B 20, new bakery 8M1

market quantity supplied = 30 + 20 + 8 = 58 loavesA1

(b) There is an extra quantity at every price, so market supply shifts to the rightR1

Quick check

1. How is market supply derived?

2. Why might a firm supply nothing at a very low price?

3. What happens to market supply when firms leave the industry?

Answers: 1. add firms' quantities at each price 2. the price does not cover its costs 3. it shifts left

3 The law of supply: why supply curves slope upward

Higher prices mean higher profits, so firms produce more.

Think about it

If the price of avocados doubled, what would avocado farmers do this year? What would they do over the next five years?

The law of supply states that, ceteris paribus, there is a positive (direct) relationship between the price of a good and the quantity supplied: as price rises, quantity supplied rises; as price falls, quantity supplied falls.

There are two main explanations at SL level. First, the profit motive: firms aim to make profit, so a higher price, with costs unchanged, makes each unit more profitable and gives firms an incentive to produce more. Firms may switch resources from other products to the one whose price has risen.

Second, rising costs as output increases: producing more usually means using resources that are less efficient, paying overtime, or running machines harder. Firms will only produce these extra, more costly units if the price is high enough to cover the extra cost. So a higher price is needed to call forth a larger quantity. At HL, this is explained formally by the law of diminishing marginal returns and rising marginal cost (Section 7).

A third, related reason is new entry: a higher price attracts new firms into the market, adding to market supply.

Key point

The supply curve slopes upward because higher prices raise profitability and cover the higher costs of producing extra output.

Quick check

1. State the law of supply.

2. Explain the profit motive behind the law of supply.

3. Why do costs often rise as output increases?

Answers: 1. positive relationship between price and quantity supplied, ceteris paribus 2. higher price raises profit per unit, giving an incentive to produce more 3. less efficient resources, overtime, machines worked harder

4 Movements along the supply curve and shifts of the curve

Own price moves along the curve. Costs, technology, taxes and the number of firms shift it.

The rule is the same as for demand. A change in the good's own price causes a movement along the supply curve: a rise in price causes an extension (increase in quantity supplied), a fall causes a contraction.

A change in any other factor that affects producers causes a shift of the whole supply curve. A shift to the right is an increase in supply: more is supplied at every price, or, equivalently, each quantity is supplied at a lower price because costs have fallen. A shift to the left is a decrease in supply.

Figure 2. An increase in supply lowers price and raises quantity; a decrease raises price and lowers quantity.

In panel (a), supply shifts right from S1 to S2. At the original price there is now excess supply, so the price falls, and quantity demanded extends along the demand curve until a new equilibrium is reached at a lower price and higher quantity. In panel (b), the leftward shift creates excess demand at the original price, so the price rises and quantity falls.

	Movement along	Shift
Caused by	the good's own price	costs, technology, taxes, subsidies, number of firms, expectations, shocks
Language	extension / contraction in quantity supplied	increase / decrease in supply

Common mistake

Saying 'the price rose, so supply increased'. A price rise increases quantity supplied (a movement along). Supply itself shifts only when a non-price factor changes.

Quick check

1. What causes a movement along the supply curve?

2. Describe a rightward shift of supply in two ways.

3. What happens to equilibrium price after a decrease in supply?

Answers: 1. a change in the good's own price 2. more supplied at every price; each quantity supplied at a lower price 3. it rises

5 The non-price determinants of supply

Most supply shifts come back to one idea: a change in the cost or ability to produce.

Think about it

Name three things that could happen to a coffee farm in Brazil that would reduce the amount of coffee it supplies, even though the price of coffee has not changed.

Determinant	Increase in supply (shift right) when...	Example
Costs of factors of production	costs fall	lower wages or cheaper raw materials
Technology	technology improves	automation in car factories
Indirect taxes	taxes are cut	a lower excise duty on fuel
Subsidies	subsidies are given or raised	subsidies for solar panel producers
Prices of related goods	the price of a good in competitive supply falls, or of a good in joint supply rises	beef and leather (joint supply)
Number of firms	more firms enter	new coffee shops opening
Expectations	producers expect lower future prices	selling stocks now before prices fall
Shocks and weather	good harvests	a bumper rice crop

5.1 Costs of factors of production

If the cost of any input rises, such as wages, raw materials, energy or rent, each unit becomes more expensive to produce. At every price, producing is less profitable, so firms supply less: supply shifts left. Lower input costs shift supply right. The sharp rise in energy prices in 2022 raised costs for almost every industry and shifted supply curves to the left across many markets.

5.2 Technology

Improvements in technology allow firms to produce more output with the same inputs, lowering the cost of each unit. Supply shifts right. Examples include robotics in manufacturing, better seeds and irrigation in farming, and software that automates office work. Technology rarely shifts supply left, except when a technology fails or is banned.

5.3 Indirect taxes and subsidies

An indirect tax is a tax on spending on goods and services, collected from producers. Examples are VAT, sales taxes and excise duties on fuel, alcohol and tobacco. Because the producer must pay the tax on every unit sold, the tax acts like an extra cost: supply shifts left, or more precisely upward by the amount of the tax. A specific tax (a fixed amount per unit, such as $1 per packet) shifts the curve up in parallel. An ad valorem tax (a percentage of the price, such as 20% VAT) shifts it up by more at higher prices, so the curves diverge.

A subsidy is a payment by the government to producers, usually per unit produced. It lowers producers' effective costs, so supply shifts right (downward by the amount of the subsidy). Governments subsidise goods they want more of, such as renewable energy, public transport and basic foods.

Figure 3. A specific tax shifts supply up in parallel; an ad valorem tax pivots it, with a bigger gap at higher prices.

5.4 Prices of related goods in production

Some goods are in competitive supply: they use the same resources, so producing more of one means producing less of the other. A farmer can grow wheat or maize on the same field. If the price of maize rises, the farmer switches land to maize, and the supply of wheat shifts left.

Other goods are in joint supply: producing one automatically produces the other. Beef and leather, and petrol and diesel from refining crude oil, are examples. If the price of beef rises, more cattle are slaughtered, and the supply of leather shifts right.

5.5 Number of firms, expectations and shocks

More firms entering a market increase market supply; firms leaving reduce it. Producers' expectations matter too: if they expect higher prices in the future, they may hold back stock now, reducing current supply. Finally, supply shocks such as droughts, floods, wars, disease or factory fires can suddenly reduce supply, especially of agricultural goods. Favourable weather produces bumper harvests and shifts supply right.

In the real world

In 2021 frost destroyed part of Brazil's coffee crop, and in 2022 drought hit several growing regions. Supply shifted sharply left and world coffee prices rose to their highest level in about a decade.

WORKED EXAMPLE 2 Explaining a supply shift

Using a diagram, explain the effect of a subsidy to solar panel producers on the market for solar panels. [4]

Solution

Diagram: supply shifts right (down) from S1 to S2; price falls; quantity rises; axes labelledA1

The subsidy lowers producers' effective cost per unitR1

so producers supply more at every price; at the original price there is excess supplyR1

price falls and quantity rises to a new equilibriumR1

Common mistake

Saying a subsidy shifts the demand curve. Subsidies are paid to producers, so they shift supply. (A subsidy paid to consumers, such as a grant to buyers, would shift demand.)

Quick check

1. How does a rise in wages affect supply?

2. What is the difference between a specific tax and an ad valorem tax on a diagram?

3. Wheat and maize are in competitive supply. The price of maize rises. What happens to wheat supply?

4. Give an example of joint supply.

Answers: 1. supply shifts left 2. parallel upward shift vs pivot with widening gap 3. shifts left 4. beef and leather

6 Supply in the real world: two case studies

Supply changes are usually about costs, weather, technology or policy.

6.1 Case study: the energy price shock of 2022

In 2022 the price of natural gas in Europe rose to many times its previous level. Gas is a key input for electricity generation, fertilizer production, glassmaking and many other industries. As input costs soared, supply curves in these industries shifted left. Some fertilizer plants temporarily shut down, which in turn raised costs for farmers and shifted the supply of food crops left. This chain of supply shifts is a good example of how one cost shock spreads through many markets.

6.2 Case study: solar panels and technology

Between 2010 and 2020 the cost of producing solar panels fell by around 80% to 90%, thanks to better technology, economies of scale in Chinese factories and government subsidies in several countries. Supply shifted far to the right, prices fell dramatically and the quantity installed worldwide rose many times over. This is a clear example of technology and subsidies increasing supply.

Quick check

1. Explain how a rise in gas prices can shift the supply of food.

2. Identify two factors that increased the supply of solar panels.

Answers: 1. fertilizer costs rise, raising farmers' costs, supply shifts left 2. technology, subsidies, economies of scale

7 Diminishing marginal returns and marginal cost (HL only)

In the short run, adding more workers to a fixed factory eventually adds less and less output.

HL only

This section is Additional Higher Level content. SL students do not need it.

Think about it

A small kitchen has one oven. The first cook makes 20 meals an hour. A second cook adds 18. Will a tenth cook add as many? Why not?

Economists distinguish between the short run, a period in which at least one factor of production (usually capital, such as the size of the factory) is fixed, and the long run, in which all factors can be changed.

In the short run a firm increases output by adding more of a variable factor, usually labour, to its fixed factor. The extra output from adding one more worker is the marginal product of labour. The law of diminishing marginal returns states that as more units of a variable factor are added to a fixed factor, the marginal product of the variable factor will eventually fall.

The reason is simple: with a fixed amount of capital, each extra worker has less equipment and space to work with. In the kitchen with one oven, the first few cooks work efficiently, but soon they queue for the oven and get in each other's way.

Workers	Total product (meals)	Marginal product
1	20	20
2	38	18
3	52	14
4	62	10
5	68	6
6	70	2

If each worker costs the same wage, say $60 an hour, then as marginal product falls, the cost of producing each extra meal rises. The marginal cost (MC) is the extra cost of producing one more unit of output. With the second worker, $60 buys 18 meals, so MC is about $3.33 per meal; with the sixth worker, $60 buys only 2 meals, so MC is $30 per meal.

This is the formal link to the law of supply: because of diminishing marginal returns, marginal cost rises as output increases, so firms need a higher price to cover the cost of each extra unit. The upward slope of the supply curve reflects rising marginal cost.

WORKED EXAMPLE 3 Diminishing returns and marginal cost

Using the kitchen table and a wage of $60 per worker, calculate the marginal cost of a meal when the 3rd and the 5th workers are hired, and explain the link to the supply curve.

Solution

3rd worker: marginal product 14 meals; MC = 60 ÷ 14 = $4.29A1

5th worker: marginal product 6 meals; MC = 60 ÷ 6 = $10.00A1

MC rises because marginal product falls (diminishing marginal returns)R1

so a higher price is needed to make extra output worthwhile: the supply curve slopes upwardR1

Key point

Diminishing marginal returns is a short-run idea: it happens only because one factor is fixed.

8 Linear supply functions (HL only)

Qs = c + dP: c shifts the curve, d sets how responsive it is.

HL only

This section is Additional Higher Level content. SL students do not need it.

At HL a straight-line supply curve is written as a linear supply function: Qs = c + dP, where Qs is quantity supplied, P is price, c is the quantity supplied when the price is zero (usually negative, because firms supply nothing at very low prices), and d shows how much quantity supplied rises for each $1 rise in price.

A change in c shifts the curve: anything that changes costs, technology or the number of firms changes c. A rise in c shifts supply to the right; a fall shifts it left. A change in d changes the slope: a larger d means quantity supplied is more responsive to price, so the curve is flatter on a price–quantity diagram.

To plot the function, find the price at which supply starts: set Qs = 0, so P = −c/d. Then find one more point, for example the quantity at the highest price on your diagram, and join them.

Figure 4. A linear supply function and the effects of changing c and d.

WORKED EXAMPLE 4 Using a supply function

A bakery's weekly supply is Qs = −20 + 10P. (a) Calculate quantity supplied at $6. (b) Find the lowest price at which it supplies. (c) A new oven changes supply to Qs = 10 + 10P. Calculate the change in quantity supplied at $6.

Solution

(a) Qs = −20 + 10(6) = 40 loavesA1

(b) 0 = −20 + 10P, so P = $2M1 A1

WORKED EXAMPLE 5 Effect of a tax on a supply function

Supply is Qs = −20 + 10P. A specific tax of $2 per unit is imposed. Write the new supply function in terms of the price paid by consumers.

Solution

Producers now receive P − 2 for each unit, so substitute (P − 2) for PM1

Qs = −20 + 10(P − 2) = −40 + 10PA1

The fall in c (from −20 to −40) is a leftward shift of 20 units at every price, i.e. an upward shift of $2R1

Common mistake

Adding the tax to c directly, e.g. writing Qs = −18 + 10P. A tax lowers the price producers receive, so replace P with (P − tax) and expand.

Quick check

1. In Qs = c + dP, what does a rise in c show?

2. Qs = −10 + 5P. Find Qs at P = $8.

3. Write the supply function after a $1 subsidy on Qs = −10 + 5P.

Answers: 1. a rightward shift of supply 2. 30 3. Qs = −10 + 5(P + 1) = −5 + 5P

9 Supply and time periods

Momentary, short run, long run.

In the momentary period, supply is fixed (perfectly inelastic). In the short run, firms can vary some inputs (labour) but not capital, so supply can rise a little. In the long run, all inputs can vary and firms can enter or leave, so supply is more responsive.

WORKED EXAMPLE 6 Time periods (standard)

Explain why the supply of hotel rooms in a city is fixed in the short run.

Solution

Building new hotels takes years (capital fixed)R1

Existing hotels have a fixed number of roomsR1

Quick check

1. Why is long-run supply more responsive than short-run supply?

Answers: 1. firms can change all inputs and new firms can enter

10 Market supply from individual supply

Adding firms.

Market supply is the horizontal sum of all firms' supply at each price. More firms entering the market shift market supply to the right.

Price / $	Firm A	Firm B	Firm C	Market
2	5	3	0	8
4	8	6	4	18
6	11	9	8	28

WORKED EXAMPLE 7 Summation (basic)

Find market supply at $6.

Solution

11 + 9 + 8M1

= 28 unitsA1

11 The law of supply explained

Why supply slopes up.

As price rises, producing more becomes more profitable, so existing firms expand output and new firms may enter. Rising marginal costs (law of diminishing marginal returns) mean firms need higher prices to supply more.

WORKED EXAMPLE 8 Explaining (standard)

Explain why the supply curve slopes upwards.

Solution

Higher price increases profitability, so firms produce moreR1

Increasing marginal costs require higher prices to cover themR1

12 Diminishing marginal returns

The short-run production principle.

In the short run, at least one factor (such as capital) is fixed. Adding more of a variable factor (labour) eventually leads to smaller increases in output (diminishing marginal returns), so marginal cost rises.

Workers	Total product	Marginal product
1	10	10
2	24	14
3	36	12
4	44	8
5	48	4

WORKED EXAMPLE 9 Identifying (standard)

From the table, when do diminishing marginal returns begin?

Solution

After the 2nd worker: marginal product falls from 14 to 12A1

13 Non-price determinants of supply: applied

Shifts in real markets.

Event	Market	Effect on supply
rise in wages	restaurant meals	decrease
new technology	solar panels	increase
drought	wheat	decrease
indirect tax	cigarettes	decrease
subsidy	electric vehicles	increase
more firms enter	coffee shops	increase

WORKED EXAMPLE 10 Supply shift (exam level)

Explain the effect of a fall in the price of microchips on the supply of laptops.

Solution

Lower costs of productionR1

Supply increases: rightward shiftR1

14 Joint and competitive supply

Linked products.

Goods in joint supply are produced together (beef and leather): an increase in beef production increases leather supply. Goods in competitive supply use the same resources (wheat and barley on farmland): more of one means less of the other.

WORKED EXAMPLE 11 Competitive supply (standard)

Explain why a rise in the price of wheat might reduce the supply of barley.

Solution

Farmers switch land from barley to more profitable wheatR1

15 Expectations and supply

Planning ahead.

If producers expect prices to rise, they may hold back supply now to sell later (oil, housing); if they expect prices to fall, they may increase supply now.

Quick check

1. How might expected future price rises affect current oil supply?

Answers: 1. supply decreases now as producers store oil to sell later

16 Producer surplus (introduction)

Receiving more than needed.

Producer surplus is the difference between the price producers receive and the minimum price at which they are willing to supply (shown by the supply curve). It is the area above the supply curve and below the price.

WORKED EXAMPLE 12 Calculation (standard)

Qs = −20 + 5P. At P = $10, Qs = 30. Calculate producer surplus.

Solution

Minimum price $4M1

½ × 30 × (10 − 4) = $90A1

17 Movement along versus shift of supply

A common exam distinction.

A change in the good's own price causes a movement along the supply curve (change in quantity supplied). A change in any other determinant shifts the whole curve (change in supply).

Common mistake

Saying 'an increase in price increases supply'. A price rise increases quantity supplied (movement along); supply itself increases only if a non-price determinant changes.

Quick check

1. Classify: (a) the price of strawberries rises; (b) a frost destroys strawberry plants.

Answers: 1. (a) movement along; (b) leftward shift

18 Supply in agricultural markets

Weather and time lags.

Agricultural supply is affected by weather, disease and time lags between planting and harvest. This makes supply unpredictable and prices volatile, a reason for government intervention (buffer stocks, subsidies).

In the real world

Global cocoa prices rose sharply in 2023–2024 after poor harvests in Ghana and Côte d'Ivoire due to weather and disease.

Quick check

1. Why is the short-run supply of crops inelastic?

Answers: 1. output cannot change until the next harvest

19 Supply of services

Labour-intensive supply.

Service supply (haircuts, healthcare, tutoring) depends heavily on labour availability and wages, and capacity can be limited by qualified staff. Technology (online platforms) can increase supply.

Quick check

1. How did online platforms affect the supply of taxi services?

Answers: 1. increased supply by allowing many more drivers to enter the market

20 Mixed review: worked problems

Bringing the ideas together.

WORKED EXAMPLE 13 Mixed problem (exam level)

Qs = −10 + 4P. (a) Calculate Qs at $5 and $8. (b) A new technology changes the function to Qs = 10 + 4P. Calculate Qs at $5 and describe the change.

Solution

(a) 10 and 22A1 A1

(b) 30: supply has increased (rightward shift of 20 units)A1 R1

21 Additional exam-style practice

Paper 1 and Paper 3.

WORKED EXAMPLE 14 Paper 1 part (a) (exam level)

Using a diagram, explain two factors that could cause the supply of electric cars to increase. [10]

Solution

Correct supply diagram showing rightward shiftA1

Factor 1: fall in battery costs (lower costs of production)R1 R1

Factor 2: government subsidy or new technologyR1 R1

22 Supply and sustainability

Hidden costs.

Market supply curves reflect private costs only. If production causes pollution, the social cost is higher than the private cost, so the market over-supplies (see 2.8). Sustainable supply may require regulation, taxes or certification.

Quick check

1. Why might a market supply too much of a polluting good?

Answers: 1. producers do not pay the external costs

23 Common misconceptions and links

Students often think…	Actually…
a rise in price increases supply	it increases quantity supplied (movement along)
a tax shifts demand	taxes on producers shift supply left / up
a subsidy shifts demand right	a producer subsidy shifts supply right / down
an increase in supply means a higher price	an increase in supply lowers equilibrium price
joint supply and competitive supply are the same	joint: produced together; competitive: produced instead of each other
diminishing returns is a long-run idea	it happens only in the short run when one factor is fixed

How 2.2 connects to the rest of the course

Topic	Connection
2.1 Demand	the other side of the market
2.3 Equilibrium	supply shifts change equilibrium price and quantity
2.6 Elasticity of supply	how responsive quantity supplied is to price
2.7 Role of government	indirect taxes and subsidies in depth
3.2 Aggregate supply	SRAS shifts with costs, just like market supply

24 Exam-style question with markscheme

Try this under exam conditions (about 15 minutes) before reading the markscheme.

Figure 5. World coffee prices.

Text A. In 2021 frost destroyed a large part of Brazil's coffee crop. Fertilizer prices also rose sharply in 2022 as energy prices soared. New drought-resistant coffee varieties are being developed.

(a) Define the term supply. [2]

(b) Calculate the percentage increase in the coffee price index between 2020 and 2022. [2]

(d) Explain one other factor in Text A that could change the supply of coffee. [2]

(e) Before the frost, supply from one region was Qs = −40 + 20P (P in $ per kg). The frost reduces quantity supplied by 30 at every price. Write the new function and calculate quantity supplied at $3. [3]

Markscheme

Part	Answer	Marks
(a)	the quantity producers are willing and able to supply	A1
	at each price in a given period, ceteris paribus	A1
(b)	(158 − 104) ÷ 104 × 100	M1
	= 51.9%	A1
(c)	diagram: supply shifts left, higher price, lower quantity	A1
	frost destroys crops: less can be produced at every price	R1
	excess demand at the old price	R1
	price rises, quantity falls	R1
(d)	e.g. higher fertilizer costs shift supply left / new technology shifts supply right	A1
	explanation linked to costs of production	R1
(e)	Qs = −70 + 20P	A1
	at $3: −70 + 60 = −10, so nothing is supplied at $3	M1 A1

Examiner's comments. In (c), weaker answers shifted demand. The frost affects the ability to produce, so it is a supply shift. In (b), using 158 as the denominator was the most common error. In (e), many candidates did not notice that the quantity is negative, which means the price is below the minimum supply price.

25 Check your understanding

Section A: multiple choice

1. A rise in wages in an industry shifts supply

A. to the left B. to the right C. not at all D. along the curve

2. An improvement in technology shifts supply

A. to the left B. not at all C. to the right D. along the curve

3. A subsidy to producers

A. shifts supply to the left B. shifts supply to the right C. shifts demand right D. raises costs

4. A change in the good's own price causes

A. a shift of supply B. a shift of demand C. no change D. a movement along the supply curve

5. Beef and leather are in

A. competitive supply B. joint supply C. composite demand D. derived demand

6. Market supply is

A. the sum of all firms' supply at each price B. one firm's supply C. total demand D. the equilibrium quantity

7. An ad valorem tax

A. shifts supply down in parallel B. shifts demand left C. has no effect D. pivots the supply curve upward

8. A bumper harvest will

A. shift supply left B. shift demand right C. shift supply right D. cause a movement along supply

9. If Qs = −20 + 10P, quantity supplied at P = $5 is

A. 10 B. 50 C. 70 D. 30

10. The law of diminishing marginal returns applies

A. in the long run B. in the short run when a factor is fixed C. only to capital D. only in agriculture

Section B: structured

11. Explain the difference between a change in supply and a change in quantity supplied. [4]

12. Using a diagram, explain the effect of an indirect tax on the market for cigarettes. [4]

13. Explain why the supply curve slopes upward. [3]

14. Distinguish between joint supply and competitive supply, with examples. [4]

15. Workers 1 to 4 add 25, 20, 12 and 5 units. With a wage of $100, calculate the marginal cost of output for the 2nd and 4th worker and explain the trend. [3]

16. Derive the supply function after a $3 specific tax on Qs = −30 + 6P. [2]

Answers

1. A 2. C 3. B 4. D 5. B 6. A 7. D 8. C 9. D 10. B

11. A change in supply is a shift caused by a non-price factor; a change in quantity supplied is a movement along the curve caused by the good's own price.

12. Tax raises costs; supply shifts up by the tax; higher price, lower quantity.

13. Higher price raises profit, giving an incentive to produce more and covering the rising costs of extra output.

14. Joint: produced together (beef, leather); competitive: produced instead of each other (wheat, maize).

15. $5 and $20 per unit; MC rises because marginal product falls.

16. Qs = −30 + 6(P − 3) = −48 + 6P.

26 Summary and topic map

Idea	Remember
Supply	willing and able to supply at each price, in a period, ceteris paribus
Law of supply	positive relationship between price and quantity supplied
Why it slopes up	profit incentive; rising costs of extra output; new entrants
Movement along	own price changes
Shift	costs, technology, taxes, subsidies, related goods, number of firms, expectations, shocks
Tax / subsidy	tax shifts supply up/left; subsidy shifts it down/right
Diminishing returns (HL)	fixed factor: marginal product falls, MC rises
Qs = c + dP (HL)	c shifts the curve; d sets responsiveness

Before the exam, make sure you…

•never say 'supply rises' when the good's own price rises
•shift supply, not demand, for taxes, subsidies, costs and weather
•show a specific tax as a parallel upward shift
•explain every shift through costs or ability to produce
•finish every shift at the new equilibrium price and quantity

Supply on one page

Cover this page with a sheet of paper and try to rebuild it from memory. Whatever you can't recall is what to revise next.

Figure 6. Topic map for Supply.

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