Supply, Price & Quantity (Cambridge International IGCSE Economics)

Introduction to Supply

Spec point — 2.4.1 · Definition, drawing and interpretation of appropriate diagrams. The link between individual and market supply in terms of aggregation

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

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

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

• Individual and market supply can also be represented graphically

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

Movements Along a Supply Curve

Spec point — 2.4.1 · A supply curve to be drawn and used to illustrate movements along a supply curve with appropriate terminology, for example 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

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