Movements Along & Shifts of the Supply Curve (Cambridge International IGCSE Economics)

Movements along a supply curve

Spec point — Movements along a supply curve; Causes of extensions and contractions in supply

• 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

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 quantity supplied

• 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 quantity supplied

Shifts of the supply curve

Spec point — Shifts of the supply curve

• There are several factors that will change the supply of a good or service, irrespective of the price level

• Collectively, these factors are called the conditions of supply and include:

  • Changes to the costs of production
  • Changes to indirect taxes and subsidies
  • Changes to technology
  • Changes to the number of firms
  • Weather events
  • Future price expectations
  • Goods in joint and competitive supply

• Changes to any of the conditions of supply shift the entire supply curve (as opposed to a movement along the supply curve)

A graph that shows how changes to any of the conditions of supply shifts the entire supply curve left or right, irrespective of the price level

• For example, if a firm's cost of production increases due to the increase in price of a key resource, then there will be a decrease in supply as the firm can now only afford to produce fewer products

  • This is a shift in supply from S to S₁. The price remains unchanged at £7 but the supply has decreased from 10 to 2 units

Causes of changes to the conditions of supply

Spec point — Causes of changes to the conditions of supply

1. Changes to the costs of production

• If the price of raw materials or other costs of production change, firms respond by changing supply.

Changes to the conditions of supply shift the entire supply curve

• If costs of production increase

  • Supply decreases and shifts left (S→S₁)
  • For example, rising aluminium prices increase bicycle production costs in Malaysia, causing supply to fall

• If costs of production decrease

  • Supply increases and shifts right (S→S₂)

2. Changes to indirect taxes

• Any change to indirect taxes changes the cost of production for a firm and impacts supply

Changes to the conditions of supply shift the entire supply curve

• If indirect taxes increase

  • Supply decreases and shifts left (S→S₁)
  • For example, a higher sugar tax in Thailand raises costs for soft drink producers, reducing supply

• If indirect taxes decrease

  • Supply increases and shifts right (S→S₂)

3. Changes to subsidies

• Changes to producer subsidies directly impact the cost of production for the firm

Changes to the conditions of supply shift the entire supply curve

• If subsidies increase

  • Supply increases and shifts right (S→S₂)

• If subsidies decrease

  • Supply decreases and shifts left (S→S₁)
  • For example, the removal of farming subsidies in Argentina reduces agricultural output

4. Changes to the state of technology

• New technology increases productivity and lowers costs of production
• Ageing technology can have the opposite effect

Changes to the conditions of supply shift the entire supply curve

• If technology improves

  • Supply increases and shifts right (S→S₂)
  • For example, new irrigation systems in Morocco help farmers produce more crops with less water

• If technology worsens

  • Supply decreases and shifts left (S→S₁)

5. Change in the number of firms in the industry

• The entry and exit of firms into the market has a direct impact on the supply
• If ten new firms start selling building materials in Hanoi, the supply of building material will increase

Changes to the conditions of supply shift the entire supply curve

• If the number of firms increases

  • Supply increases and shifts right (S→S₂)

• If the number of firms decreases

  • Supply decreases and shifts left (S→S₁)
  • For example, several electronics factories close in South Africa due to constant power outages, reducing supply

6. Weather events

• Droughts or flooding can cause a supply shock in agricultural markets
• A drought will cause supply to decrease
• Unexpectedly good growing conditions can cause supply to increase

Changes to the conditions of supply shift the entire supply curve

• If the weather is good

  • Supply increases and shifts right (S→S₂)
  • For example, ideal monsoon rains boost rice production in India

• If the weather is bad

  • Supply decreases and shifts left (S→S₁)
  • For example, severe drought in Kenya reduces the coffee harvest, lowering supply

7. Future price expectations

• Producers base their supply decisions not only on current prices, but also on what they expect prices to be in the future
• Changes in expectations cause a shift of the supply curve

Changes to the conditions of supply shift the entire supply curve

If prices are expected to rise in the future

• Producers will prefer to sell later at the higher expected price

• This means they:

  • Hold back stock now
  • Reduce current supply
  • Shift the supply curve left

• Result: Supply decreases (S → S₁)

• Example: Farmers store grain if they expect higher prices next month

If prices are expected to fall in the future

• Producers will prefer to sell now before prices drop

• This means they:

  • Release more stock onto the market
  • Increase current supply
  • Shift the supply curve right

• Result: Supply increases (S → S₂)

• Example: Oil producers increase current exports if they expect global prices to fall

Summary Table

Exam Hint Several of the conditions of supply change the costs of production. However, be sure to explain each condition as a standalone point before linking it to the cost of production (for example, a change in indirect taxation).

A common error by students is to explain that a subsidy (for example, a £3,000 subsidy for each electric vehicle produced) shifts the demand curve for electric vehicles to the right. This is incorrect. The subsidy will shift the supply curve to the right. Then, due to the lower price, there will be a movement along the demand curve (extension of quantity demanded) to create a new market equilibrium.