Supply: notes and practice questions
- This topic covers the concept of supply, its determinants, and how it is represented graphically.
- The law of supply states that as price increases, the quantity supplied increases, ceteris paribus.
- The supply curve illustrates the positive relationship between price and quantity supplied.
- Non-price determinants of supply include changes in costs of factors of production, prices of related goods, indirect taxes and subsidies, future price expectations, changes in technology, and the number of firms.
- A change in price causes a movement along the supply curve, while a change in a non-price determinant causes a shift of the supply curve.
How it is examined
Same shape as 2.1. It is most often examined jointly with demand, in a Paper 2 4-mark part asking for a demand and supply diagram plus explanation, or as the mechanism inside a larger Paper 1 part (a).
- The law of supply: the relationship between price and quantity supplied. (AO2)
- The supply curve, drawn upward-sloping. (AO4)
- The relationship between an individual producer's supply and market supply. (AO2)
- The non-price determinants of supply: changes in the costs of factors of production; prices of related goods, in the cases of joint supply and competitive supply; indirect taxes and subsidies; future price expectations; changes in technology; number of firms. (AO2)
The assumptions underlying the law of supply: the law of diminishing marginal returns, and increasing marginal costs. (AO2)
Guiding questions
- How do producers make choices in trying to meet their economic objectives?
Linking questions
- Pairs with 2.1 to give 2.3.
- Indirect taxes and subsidies as determinants become the intervention tools of 2.7.
- Diminishing marginal returns (HL) underpins the cost curves in 2.11.
- Costs of factors of production reappear as the SRAS determinants in 3.2.
Practice questions
2 questions · 2 hardQuestion 1
HardPaper 1 · no calculator25 marks(a) Explain two non-price determinants that could increase the market supply of a good.
(b) Using real-world examples, evaluate the effectiveness of providing subsidies to producers to increase the consumption of merit goods.
Think about what makes it cheaper or easier for a firm to produce a good. Consider factors related to costs, technology, and government actions. Remember to show the effect on a supply curve diagram.
Start by defining a merit good and explaining why it is under-consumed in a free market. Then, explain how a subsidy works. For your evaluation, consider the pros and cons of using subsidies from the perspective of different stakeholders (consumers, producers, government) and the economy as a whole. What are the challenges in implementing this policy effectively? Make sure to use a specific real-world example.
Question 2
HardPaper 1 · no calculator25 marksExplain how one determinant of demand might lead to an increase in the price of electric vehicles and how one determinant of supply might lead to a decrease in the price of electric vehicles.
Using real-world examples, evaluate the proposition that governments should always use price ceilings (maximum prices) to make essential goods more affordable.
For the first part, think about factors that would make more people want to buy electric vehicles at any given price. For the second part, consider factors that would make it cheaper or easier for firms to produce electric vehicles. Use separate demand and supply diagrams to illustrate each change and its effect on the equilibrium price.
Start by explaining how a price ceiling works using a diagram. Then, consider the arguments for this policy (e.g., equity, affordability) and the arguments against it (e.g., shortages, black markets). Use a specific real-world example, like rent control or food price caps, to support your evaluation. The word 'always' is a key part of the proposition to evaluate.
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Where marks are lost
- No real-world example, or a stated one. An answer that names a country and stops cannot reach the top two bands.
- One-sided argument. Balance is an explicit axis. A student who argues only that a policy works is capped at 9 out of 15 on that axis alone.
- Diagram present but not explained. The diagram bullet escalates across three bands: included, included and explained, included and fully explained. A diagram dropped into an answer without prose that refers to it sits at 5 to 6 on a 10-mark part.
