Preview
IB DP Economics — Unit 2: Microeconomics | SL | 2.2 Supply
📋 What You Will Learn
- Define supply and the law of supply, distinguishing between a change in quantity supplied and a change in supply
- Identify and explain the non-price determinants of supply (costs of production, technology, prices of related goods, number of firms, expectations, government intervention, and natural/external factors)
- Analyse how each determinant causes the supply curve to shift left or right, with reference to correctly drawn diagrams
- Apply the concept of supply shifts to real-world market scenarios, including commodity markets, agricultural markets, and manufacturing
- Evaluate the significance of supply-side changes for market equilibrium, prices, and quantities
🔍 Guiding Question Why do firms choose to supply more or less of a good even when its price has not changed — and what are the economic consequences for markets when they do?
🌍 Why This Matters In 2023, a severe drought across southern Europe and North Africa destroyed olive harvests, causing global olive oil supply to collapse. Prices in the UK and EU more than doubled — not because consumers suddenly wanted more olive oil, but because producers could supply far less at every price level. Understanding what shifts supply is essential to understanding why prices change in the real world.
Supply and the Law of Supply
Before examining what shifts supply, it is essential to understand what supply means and what the law of supply states. Supply is not simply the amount a firm produces — it is a relationship between price and quantity over a range of prices.
📖 Definition — Supply Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at each possible price level over a given time period, ceteris paribus (all other things being equal).
📖 Definition — Law of Supply The law of supply states that, ceteris paribus, as the price of a good rises, the quantity supplied increases; and as the price falls, the quantity supplied decreases. There is a positive (direct) relationship between price and quantity supplied.
The logic behind the law of supply is straightforward: higher prices make production more profitable, incentivising existing firms to expand output and attracting new firms into the market. Lower prices reduce profitability, causing firms to cut back production.
Movement Along vs Shift of the Supply Curve
This distinction is one of the most frequently tested concepts in IB Economics. Confusing the two is a mark-losing error in every paper.
- Movement along the supply curve: caused only by a change in the price of the good itself. Quantity supplied changes; the supply curve does not move. Called an extension (price rises → quantity supplied rises) or contraction (price falls → quantity supplied falls).
- Shift of the supply curve: caused by a change in any non-price determinant of supply. The entire supply curve moves — at every price level, producers are now willing to supply a different quantity.
- Rightward shift (increase in supply): at every price, more is supplied. The curve moves right/downward. Producers are more willing or able to supply.
- Leftward shift (decrease in supply): at every price, less is supplied. The curve moves left/upward. Producers are less willing or able to supply.
🔗 Analogy — The Shift vs Movement Distinction Think of the supply curve as a schedule of offers from producers. A price change is like a customer offering more money — the producer moves to a different point on the same schedule. A non-price change is like rewriting the entire schedule — every offer changes simultaneously. The schedule itself has shifted.
Non-Price Determinants of Supply
There are seven major categories of non-price determinants recognised in the IB