The Theory of Market Supply

Supply is the quantity of a product that a producer is willing and able to supply / sell onto a market at a
given price in a given time period

The law of supply - a greater quantity of a good or service will be supplied at a higher price. In part this is
due to the profit incentive. For example, if you are a business extracting crude oil, you stand to make a
higher profit for every barrel supplied if the market price is $100 compared to a price of $60.

A change in market price of the product itself will cause a movement along the market supply curve

But changes in other conditions of supply (i.e. non-price factors) will bring about a shift in the supply curve.
Most of these supply conditions relate to the costs of production facing a business. But supply can also be
affected by changes in the prices of other goods and services, price expectations, shifts in technology,
supply-shocks that disrupt normal supply and also the impact of government regulations on producers.

In the exercise below identify whether the change in the market will bring about either a movement along the
supply curve or a shift in the supply curve at each price. And then decide whether you expect to see a
contraction/expansion of supply (for a movement along) or a fall/increase in supply (for a shift).

Exercise on the determinants of supply

Supply for? Change in the market Movement (i) For a (ii) For a shift
along curve movement - in supply -
OR a shift in expansion or increase or
the supply contraction? decrease?
curve?

Supply of frozen An increase in the price of

pizzas frozen pizzas due to an
increase in demand

Wheat supply Drought conditions in East

(UK) Anglia are expected to continue
through to harvest time

Christmas cards A fall in the international price of

pulp

Market supply for A rise in the price of aviation

transatlantic flights fuel

Market supply for Two airlines from Asian

transatlantic flights countries enter the market for
flights from London to New York

Market supply of Many cotton crops across Asia

clothing in retail are destroyed by floods
stores

Supply of new The local council relaxes

flats to rent in the planning laws for property
city of Oxford developers

The market supply The US government offers a

of corn in the USA subsidy of $2 per tonne for
wheat farmers who convert
their wheat into bio-fuels
 Supply for? Change in the market Movement (i) For a (ii) For a shift
along curve movement - in supply -
OR a shift in expansion or increase or
the supply contraction? decrease?
curve?

World supply of New transitional government in

petroleum Libya announces the reopening
of Libyan refineries

Supply of workers The government increases the

to the fruit-picking minimum wage that must be
industry paid to people working in the
farming industry

Market supply of A long term rise in the market

milk in the UK price of lamb

Supply of real ale The government reduces the

tax applied to each bottle of real
ale produced in the UK

Supply of A government subsidy of £20 is

mountain bikes offered to mountain-bike
manufacturers to encourage
cycle use in towns and cities

Supply of white A rise in the world price of flour

bread

Market supply of Improvements in production

bottled water technology reduce the amount
of plastic needed for each bottle

Supply of package Expectations of a recession in

holidays to Spain the UK economy in 2012
and Italy in 2012

Supply of organic A fall in the productivity of

chocolate farmers supplying organic
chocolate

Market supply of Expectations of a rise in the

potato chips price of potatoes in world
markets

Supply of frozen The government introduces a

pizza tax on all high-fat frozen foods
of 10% (including pizza)

Market supply of The government introduces

strawberries tougher regulations on the
quality of strawberries that can
be sold in UK supermarkets