Lesson preview · Supply
Supply and what changes it
~8 min · Free to read
On 21 March 2015, a sold-out concert ended at Madison Square Garden in New York. More people wanted a ride than there were cars nearby. So the ride-hailing app Uber raised its fares, at their peak to 1.8 times the usual price.
A study of that night found that while fares were high, up to twice as many drivers were nearby as before. Its authors, two of whom worked for Uber, say they can’t prove the fares caused this: some drivers may have come anyway. So this one night shows a link, not proof.
The drivers are sellers, and the higher price seems to have drawn more in.
Key Term
Supply and the law of supply
Supply is how much of something sellers are willing and able to offer at each price. The amount offered at one price is the quantity supplied.
The law of supply: when a good’s price rises, and nothing else changes, sellers offer more of it. The quantity supplied rises. Two reasons:
- Making more becomes worth it. Each extra unit usually costs more to make than the last (overtime pay, for example). A higher price covers that extra cost.
- More sellers join in, as extra drivers seem to have done around the concert.
A supply schedule is a table of how much sellers offer at each price. Here is one for a town’s croissant bakers.
| Price of a croissant | Dozens offered | Dozens offered with cheaper flour |
|---|---|---|
| 2 dollars | 8 | 16 |
| 4 dollars | 12 | 20 |
| 6 dollars | 16 | 24 |
| 8 dollars | 20 | 28 |
Read down the middle column: as the price rises, bakers offer more. Moving along a column as the croissant’s own price changes is a change in quantity supplied.
Now compare the last two columns. Cheaper flour makes every croissant cheaper to bake, so bakers offer 8 dozen more at every price. That is an increase in supply. Less at every price is a decrease in supply.
Key Term
What changes supply
Apart from the good’s own price, these are the main things that change supply.
- Input costs: the materials, energy and wages that go into a good. Higher input costs decrease supply. In the year to March 2022, world fertiliser prices more than doubled, so growing crops cost farmers more.
- Technology: a better machine or method cuts costs and increases supply.
- Weather, for farm goods: bad weather decreases supply. In July 2021, frost damaged coffee farms in Brazil, the world’s biggest coffee producer.
- Number of sellers: more sellers, more supply, when they join for a reason other than the price.
- Taxes and subsidies: a tax on each unit sold decreases supply. A subsidy (a government payment for each unit made) increases it.
Drawn as a graph, the schedule is the supply curve. Cheaper flour cut bakers’ costs, so it shifted the supply curve right. A decrease in supply shifts it left.
With more on offer, the price fell from 4 dollars to 2, yet bakers sold more: 16 dozen, not 12. That doesn’t break the law of supply. The bakers are on a new curve, and on it a lower price still means fewer croissants: 20 dozen at 4 dollars, 16 at 2.
Trap · Common Misconception
"A higher price increases supply"
A rise in the good’s own price moves sellers along their supply curve, to a bigger quantity supplied. The curve stays put. If the concert fares drew in the extra drivers, that was a move up the curve. Only a change in something else, such as costs or the weather, shifts the curve.
Trap · Common Misconception
"If buyers want more, supply rises"
If people’s incomes rise and they want more croissants, that is a change in demand. To test a change, ask: apart from the price, does it change sellers’ costs, how much they can produce, or how many sellers there are? Higher incomes do none of these, so supply doesn’t shift.
Check yourself · no marks
A bakery buys a new oven. It bakes twice as many loaves an hour, using the same staff and electricity. Does the bakery’s supply shift left, shift right, or stay put?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 5
The price of a box of strawberries rises from 3 dollars to 5 dollars. Nothing else changes. What does the law of supply predict?
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