What determines how much of a good firms are willing to sell?
The supply curve and the law of supply, the conditions of supply that shift it, the distinction between movements and shifts, and the role of profit, costs and indirect taxes and subsidies.
An answer to AQA A-Level Economics 4.1.3, covering the supply curve and the law of supply, the conditions of supply that shift it, the difference between movements and shifts, and how costs, profit, indirect taxes and subsidies affect supply.
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What this dot point is asking
AQA wants you to explain the law of supply and the upward-sloping supply curve, distinguish movements from shifts, list the conditions of supply, and show how indirect taxes and subsidies shift the curve and split the burden between buyers and sellers. This is core 4.1.3 material that feeds price determination.
The supply curve and the law of supply
The supply curve slopes upwards for two linked reasons. First, a higher price makes production more profitable, so existing firms expand output and new firms enter. Second, marginal cost typically rises as output expands (the law of diminishing returns in the short run), so firms need a higher price to make additional units worthwhile. The supply curve is therefore the firm's marginal cost curve in competitive conditions.
Movements versus shifts
The conditions of supply include the costs of production (wages, raw materials, energy), technology and productivity (which lower unit costs and shift supply right), indirect taxes and subsidies, the number of firms in the market, weather and natural shocks (for agriculture), and the prices of goods in joint supply (for example, beef and leather) or competitive supply (the firm can switch resources between products).
Indirect taxes and subsidies
- An indirect tax shifts the supply curve vertically upwards (to the left) by the amount of the tax per unit. A specific (per unit) tax shifts it in parallel, while an ad valorem (percentage) tax pivots it so the vertical gap widens at higher prices.
- A subsidy shifts the supply curve vertically downwards (to the right) by the amount of the subsidy.
The incidence (burden) of a tax is split between consumers (higher price) and producers (lower net receipts) according to relative elasticities. The more price-inelastic demand is, the larger the share consumers bear.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 20184 marksExplain, using a supply and demand diagram, the effect of a specific indirect tax on the equilibrium price and quantity of a good.Show worked answer →
A 4 mark question rewards a correct diagram description and the right direction of effect.
Diagram. A specific (per unit) tax raises firms' costs, shifting the supply curve vertically upwards by the tax per unit, a parallel leftward shift from S to S plus tax.
Effect. The new equilibrium has a higher price and a lower quantity. The consumer price rises by less than the full tax because the burden is shared with producers; the size of each share depends on relative elasticities.
Markers reward a parallel upward shift equal to the tax and the conclusion of higher price, lower quantity.
AQA 20204 marksCalculate the new market price and the tax revenue if a 3 pound per unit specific tax is imposed where, before the tax, equilibrium price is 10 pounds and quantity is 500 units, and the tax raises the consumer price to 12 pounds with quantity falling to 420 units.Show worked answer →
A 4 mark calculation rewards correct working and units.
- New consumer price
- Stated as 12 pounds.
- Tax revenue
- Revenue equals tax per unit times new quantity, pounds.
- Burden split
- Consumers pay 2 pounds more per unit (), producers absorb 1 pound (the 3 pound tax less the 2 pound price rise). Markers reward pounds revenue and a correct burden split. Show the formula, not just the answer.
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Sources & how we know this
- AQA A-level Economics (7136) specification — AQA (2015)