IBEconomicsHLRevision Notes2. Microeconomics2.2 Supply2.2.1 Supply, Price & Quantity

Supply, Price & Quantity (HL IB Economics)

Revision Note

Introduction to Supply

  • Supply is the amount of a good/service that a producer is willing and able to supply at a given price in a given time period

  • A supply curve is a graphical representation of the price and quantity supplied by producers

    • If data were plotted, it would be an actual curve. Economists, however, use straight lines so as to make analysis easier
       

  • The supply curve is sloping upward as there is a positive relationship between the price and quantity supplied (QS)

    • Rational profit maximising producers would want to supply more as prices increase in order to maximise their profits
          

  • The law of supply states that there is a positive (direct) relationship between quantity supplied and price, ceteris paribus

    • When the price rises the QS rises

    • When the price falls the QS falls
       

Individual and Market Supply

  • Market supply is the combination of all the individual supply for a good/service

    • It is calculated by adding up the individual supply at each price level
        

The Monthly Market Supply of Bread from 4 Bakeries in a Small town


Bakery 1


Bakery 2


Bakery 3


Bakery 4


Market Supply


300

600

180

320

1400 loaves

  • Individual and market supply can also be represented graphically
     

    2-4-1-supply-price-and-quantity-1

Market supply for smart phones in December is predominantly the combination of iPhone and Samsung supply

Diagram Analysis

  • In New York City, the market supply for smart phones in December is predominantly the combination of iPhone and Samsung supply

  • At a price of $1000, the supply of iPhones is 300 units and the supply of Samsung phones is 320 units

  • At a price of $1,000, the market supply of smart phones in New York City during December is 620 units

Assumptions Underlying the Law of Supply

  • The law of supply is based on two key assumptions

    • The law of diminishing marginal returns

    • Increasing marginal costs
       

  • Both of these assumptions focus on the cost-related factors that influence the supply decisions of producers

    • These assumptions explain why the supply curve slopes upward
       

Using Examples to Explain the Assumptions Underlying the Law of Supply


Assumption


Explanation


Example

The Law of Diminishing Marginal Returns

  • As more of a variable factor of production (e.g. labour) is added to fixed factors (e.g. capital), there will initially be an increase in productivity

  • However, a point will be reached where adding additional units of the factor (e.g. hiring an extra worker) begins to decrease productivity due to the relationship between labour and capital

  • E.g. consider a farmer who has a fixed amount of land and hires additional workers to cultivate the crops

    • Initially, each additional worker contributes to a significant increase in crop output

    • However, as more workers are hired, the additional output generated by each new worker starts to decline

    • This is because the fixed amount of land and other resources become increasingly crowded relative to the growing labor force, leading to diminishing returns from each additional worker

Increasing Marginal Costs

  • The concept that as a producer increases the quantity of a good/service supplied, the additional cost of producing each additional unit also increases

  • This relationship is reflected in the upward-sloping supply curve, indicating that producers are willing to supply a greater quantity at higher prices to justify the higher costs of production

  • A bicycle manufacturer may have spare production capacity and can increase output by simply utilising existing resources more efficiently

    • As production increases, the firm may need to invest in additional equipment, hire more workers, or incur other costs to maintain the same rate of expansion

    • These additional costs contribute to increasing marginal costs

Movements Along a Supply Curve

  • If price is the only factor that changes (ceteris paribus), there will be a change in the quantity supplied (QS)

    • This change is shown by a movement along the supply curve
        

IIlRP6jh_1-2-4-movement-along-supply-curve_edexcel-al-economics

A supply curve showing an extension in quantity supplied (QS) as prices increase and a contraction in quantity supplied (QS) as prices decrease

Diagram Analysis

  • An increase in price from £7 to £9 leads to a movement up the supply curve from point A to B

    • Due to the increase in price, the quantity supplied has increased from 10 to 14 units

    • This movement is called an extension in QS
       

  • A decrease in price from £7 to £4 leads to a movement down the supply curve from point A to C

    • Due to the decrease in price, the quantity supplied has decreased from 10 to 7 units

    • This movement is called a contraction in QS

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