A) Movements along and shifts of the supply curve

There is normally a positive relationship between price and quantity supplied. As price increases, firms have a greater incentive to increase the quantity they supply.

For example, if price rises from P2 to P1, quantity supplied increases from Q2 to Q1. This is an extension in supply and represents a movement along the existing supply curve.

If price falls, firms have less incentive to supply the same quantity and there will be a contraction in supply. Movements along the supply curve are caused by changes in price, assuming all other factors remain equal.

A shift of the supply curve is different. It occurs when a non-price factor changes how much firms are willing and able to supply at each price.

B) Factors that may cause a shift in the supply curve

A rightward shift of the supply curve represents an increase in supply, while a leftward shift represents a decrease in supply.

• Technology – Improvements in technology can allow firms to produce more efficiently. This can reduce costs and increase supply.
• Indirect taxes and subsidies – Higher indirect taxes increase firms’ costs and are likely to reduce supply. Subsidies reduce firms’ costs and can encourage them to increase supply.
• Number of firms – If more firms enter a market, the overall supply of goods or services to that market is likely to increase.

What the full guide adds

For this topic, the full AS guide also covers:

• A fuller explanation of why the supply curve slopes upwards, including the profit motive and the higher costs firms may face as output increases.
• Productivity and how changes in productivity can affect the quantity firms are able to supply.
• Weather and its effect on the supply of weather-dependent goods such as agricultural products.
• Exchange rates and how changes in the cost of imported inputs can affect firms’ costs and supply.
• More detail on specific and ad valorem indirect taxes, subsidies and other changes in production costs.