Unit 2.2: Supply
This is the second part of the section on market equilibrium. I find that it is better to cover both demand and supply at the same time, rather than focus on each separately as the two concepts come together to form the market equilibrium. Specifically for a market to exist we need to have consumers willing and able to purchase the good or service but also producers who are also willing and able to supply that product. Again the key term here is willing and able. Many individuals may be willing to produce something but are they able?
Supply is fundamentally different to demand because the relationship between the selling price and the amount that producers are willing and able to supply is directly related. In other word, as the price rises then the amount that producers will supply will also rise. Once both demand and supply have been introduced then it makes sense to cover both concepts in greater depth.
Why is there a direct (positively sloped) causal relationship between the price and quantity supplied for a good or service, ceteris paribus. What are the non-price determinants of supply?
Lesson time: 1 hour
An understanding of the direct causal relationship between price and quantity supplied, represented by the supply curve.
An understanding of the factors that result in a change supply / shift the supply curve.
The relationship between an individual producer’s supply and market supply.
Supply - the quantity of goods and services that producers are willing and able to produce at a given time, for a given price, ceteris paribus.
The class handout is available as a PDF file at: Supply
1. Beginning activity
Start by watching the following short video which explains the concept, before completing the questions which follow:
You are the production manager of Shell oil company and it is your job to decide on the level of production that you would like the business to aim for. Based on the video that you have just watched outline the possible factors that may influence your decision?
Imagine that you set up a business selling cup cakes in your current school. How many cakes would you be willing and able to supply at the following prices?
$1, $1.5, $2, $2.5, $3, $3.5, $4
Plot this on a diagram.
(a) The diagram to the right illustrates a supply curve for a good or service. Explain why the supply curve slopes upwards from left to right.
(b) Why does the supply for a product require producers to be willing and able to produce the product at each given price?
Watch the following video, focusing on the quantity supplied of milk in a diary farm, before completing the questions that follow.
Using the diagrams in the handout, illustrate the impact on the market for milk under the following circumstances:
1. The market for milk after the government places a sales tax on animal feed?
2. The market for milk following a successful advertising campaign by diary farmers?
3. The market for milk if demand for chocolate and other diary products rises?
4. The market for milk if fuel prices fall?
5. The market for milk following a rise in minimum wage in the country?
6. The market for milk following a rise in wage levels?
5. Link to the examination
Examination questions on supply can also be found in each of the three exam papers, with candidates required to apply the theory of supply to a given situation. Examples of typical questions include:
Paper 1 (part A)
Explain using a relevant diagram why an increase in the price of a good or service will lead to an increase in the quantity supplied but an increase in supply leads to a fall in selling price.
Paper three (HL only)
On paper three candidates may be asked to calculate the level of supply from a given set of data. An example might be: A firm is willing and able to supply a good according to the following formulae: Qs = 100 + 40P. Use this information to answer the following questions:
(i) Calculate quantity supplied at the following prices - $5, $6, $7, $8, $9, $10
(ii) Calculate the price resulting in a supply of 400 units per week.
The activities on this page link to the following textbook page: Unit 2.2 Supply theory