What determines how much of a good firms are willing to produce at each price?
The law of supply, why the supply curve slopes upwards, movements along versus shifts of supply, and the factors that shift supply.
An OCR J205 answer on the law of supply, the upward-sloping supply curve, movements versus shifts, and the non-price factors that shift supply.
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What this dot point is asking
OCR wants you to state the law of supply, explain why the supply curve slopes upwards, distinguish a movement along the curve from a shift, and list the non-price factors that shift supply. Supply is the other half of the demand and supply diagram that runs through J205/01.
The law of supply
The supply curve slopes upwards for two reasons. A higher price makes supplying the good more profitable, so existing firms expand and new firms enter. A higher price also helps cover the rising marginal cost of producing extra units, because pushing output up often costs more per unit. So higher price is linked to higher quantity supplied.
A supply relationship might be written : at a price of , quantity supplied is ; at it rises to , confirming the upward slope.
Movements along the supply curve
A change in the price of the good itself causes a movement along the curve:
- A rise in price causes an extension of supply (quantity supplied rises).
- A fall in price causes a contraction of supply (quantity supplied falls).
Shifts of the supply curve
A change in a non-price factor shifts the whole curve. Supply shifts right (an increase, more supplied at every price) or left (a decrease). The main factors OCR expects are:
- Costs of production: higher wages, raw materials or energy costs reduce supply (shift left); lower costs increase it (shift right).
- Technology and productivity: better technology lowers unit costs and increases supply.
- Indirect taxes and subsidies: a tax on the good shifts supply left; a subsidy shifts it right.
- Number of firms: more firms entering the market increases supply.
- Weather and shocks: for farming and some industries, good weather raises supply and disasters cut it.
Indirect taxes and subsidies
Worked diagram example
Try this
Q1. State the law of supply. [2 marks]
- Cue. As price rises, quantity supplied rises, other things being equal.
Q2. Explain how an improvement in technology would affect the supply of a good. [3 marks]
- Cue. Better technology lowers unit costs, making supply more profitable, so supply increases and the curve shifts right.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR J205/01 20184 marksExplain why the supply curve slopes upwards and give one factor that would shift it to the left.Show worked answer →
A 4 mark Explain question with two parts.
The supply curve slopes upwards because a higher price makes producing the good more profitable, so firms are willing and able to supply more; it also covers the rising marginal costs of extra output. Hence higher price is linked to higher quantity supplied.
A factor that shifts supply left (a fall in supply) is a rise in production costs, for example higher wages, energy or raw material prices, or a new tax on the good. Markers reward the profit/cost reason for the slope and one valid leftward-shift factor.
OCR J205/01 20216 marksDiscuss how a fall in raw material costs and a new tax on production would jointly affect the supply of a good.Show worked answer →
A 6 mark question needing two opposing shifts and a judgement.
A fall in raw material costs lowers firms' costs at every output, so supply increases and the supply curve shifts right. A new tax on production raises costs at every output, so supply decreases and the curve shifts left.
The two forces oppose each other, so the net effect on supply depends on their relative size: if the cost fall is larger than the tax, supply rises overall, and vice versa. Markers reward the correct shift directions, the link from costs to supply, and a judgement on which effect dominates.
Related dot points
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- Calculating total cost, average cost, total revenue, average revenue, and profit or loss, the importance of these for producers, and economies of scale.
An OCR J205 answer on calculating total and average cost, total and average revenue, and profit or loss, why these matter for producers and supply, and economies of scale.
Sources & how we know this
- OCR GCSE (9-1) Economics J205 specification — OCR (2017)