Unit 1 · Basic Economic Concepts
1.5 Supply
When the price of lumber rises, sawmills want to sell more of it — the higher price makes it worth running extra shifts, even at higher cost. That willingness to produce more at a higher price is the law of supply, and it is the reason the supply curve always slopes the same direction.
Guiding question
Why does a price change move you along the supply curve, while a change in the cost of inputs shifts the whole curve?
Learning outcome. Define the law of supply and explain, using a graph, the relationship between price and quantity supplied; explain the determinants of supply.
The law of supply states that, all else held equal, there is a positive relationship between the price of a good and the quantity of it that producers are willing and able to sell. As price rises, quantity supplied rises; as price falls, quantity supplied falls. Plotted with price on the vertical axis and quantity on the horizontal axis, that positive relationship is exactly what produces an upward-sloping supply curve.
MKT-2.C.1 · the exact idea the exam tests
The law of supply states there is a positive relationship between price and quantity supplied, leading to an upward-sloping supply curve.The purple arrow above is a movement along the supply curve — it happens only because the good's own price changed. Nothing else about the market changed; the curve itself did not move.
A price change of the good itself never shifts its own supply curve — it only moves you along it. What does shift the entire curve are the determinants of supply: everything held equal in the law of supply's "all else held equal" clause.
- Supply
- — The full relationship between every possible price of a good and the quantity producers would sell at each of those prices — not a single quantity, but the whole schedule.
- Determinants of supply
- — Factors other than the good's own price that change how much producers want to sell at every price: input (resource) prices, technology, prices of other goods the producer could make, producer expectations about the future, the number of sellers in the market, and taxes or subsidies.
- Input prices
- — The cost of the resources (labor, raw materials, capital) used to produce the good. Cheaper inputs make production more profitable at every price, increasing supply.
- Technology
- — An improvement in the production process that lets a firm produce the same output at lower cost, or more output from the same resources — this increases supply (shifts the curve right).
- Number of sellers
- — How many firms are producing and selling the good. More firms in the market means more total quantity offered at every price.
- Taxes and subsidies
- — A per-unit tax raises a producer's effective cost, decreasing supply (shifts left). A subsidy lowers effective cost, increasing supply (shifts right).
For example: if the price of steel falls and steel is an input for car manufacturers, producers can make each car more cheaply — so they want to sell more cars at every single price, not just at the price they were already charging. That is a rightward shift of the entire supply curve, called an increase in supply.
MKT-2.D.1 · the exact idea the exam tests
Factors that influence producer supply, such as changes in input prices, cause the market supply curve to shift.The price of bicycles rises, and manufacturers produce more of them. Separately, a new, cheaper manufacturing robot lets the same manufacturers produce bicycles at lower cost, so they offer more bicycles at every price than before. Are these the same kind of change on the supply graph?
Ask what actually changed in each case — the good's own price, or something else about the cost of producing it.
The vocabulary AP uses for this distinction is precise, and mixing it up is one of the most common ways points are lost: a change in the good's own price causes a change in quantity supplied (movement along the curve). A change in any determinant causes a change in supply (a shift of the entire curve).
"Supply increased" ≠ "quantity supplied increased"
These phrases are not interchangeable on the exam. "Supply increased" means the whole curve shifted right (a determinant changed). "Quantity supplied increased" means you moved along the existing curve to a higher price (nothing shifted). Using the wrong phrase for the wrong graph is a guaranteed lost point.
A change in the good's own price NEVER shifts its own supply curve
This is easy to say and easy to forget under exam pressure. If a question changes the price of the good you are graphing, draw a movement along the curve — never redraw the curve itself.
A higher INPUT cost is a decrease in supply, not an increase
Students sometimes assume "higher cost" always means "more," confusing it with the good's own price rising. A higher cost of production makes the good LESS profitable to supply at every price — the supply curve shifts LEFT (a decrease in supply), not right.
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