Supply
Allocation of Resources · 4 question types
Exam Frequency Analysis
Past paper frequency (2018 to 2024)
This topic accounts for approximately 18% of your exam marks.
Supply appears alongside demand on virtually every paper; cost changes, technology, and taxes/subsidies are the most tested supply shifters.
The states that, holding all other factors constant (), as the price of a good rises, the quantity supplied rises; and as the price falls, the quantity supplied falls.
In one symbol: price and quantity supplied are directly (positively) related (P↑ → Qs↑, P↓ → Qs↓), ceteris paribus.
Two intuitions behind the law:
- Higher profit per unit. When the selling price rises, each unit produced earns more profit, so firms have a stronger incentive to make more.
- New firms enter. A higher price makes the market more attractive. Firms that previously could not cover their costs may now enter, raising total supply. A lower price drives some firms out, reducing supply.
Just like the law of demand, the law of supply requires ceteris paribus. If costs or technology change at the same time as price, the simple positive relationship may not show cleanly. Leaving out "all else equal" loses a mark.
The law of supply explains the upward slope of the supply curve. The law of demand explains the downward slope of the demand curve. Remember which is which:
- Demand curve slopes down: P↑ → Qd↓ (an inverse relationship).
- Supply curve slopes up: P↑ → Qs↑ (a direct relationship).