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Supply
in Macroeconomics

Explore the law of supply, understand how price and quantity relate, and master the factors that shift the supply curve.

AP Macroeconomics

What Is Supply?

Supply refers to the total quantity of a good or service that producers are willing and able to offer for sale at each possible price during a given time period.

Quantity Supplied
The specific amount offered at one particular price
Supply
The entire relationship between price and quantity across all prices

The Law of Supply

Ceteris paribus (all else equal), as the price of a good rises, the quantity supplied rises. As the price falls, the quantity supplied falls. This creates an upward-sloping supply curve.

Why? Higher prices mean higher profits, which incentivize producers to increase output. At lower prices, production may not cover costs, so firms supply less.

The Supply Schedule and Curve

Quantity Price $1 $2 $3 $4 20 40 60 80 S

The Supply Function

Economists express the supply relationship as a linear function. The general form of a supply equation is:

Example
\( Q_s = -10 + 20P \)
At \( P = 3 \)
\( Q_s = -10 + 20(3) = 50 \) units

Movement Along vs. Shift Of

Movement Along P Q
\( S \)
 A B Shift of Supply P Q
\( S_1 \)
\( S_2 \)
Movement Along
Caused by a change in the good's own price. You slide from point A to point B on the same curve.
Shift of Supply
Caused by a change in a non-price determinant. The entire curve moves left or right.

Determinants That Shift Supply

Remember the mnemonic ROTTEN: these are the non-price factors that shift the entire supply curve.

R
Resource costs: Higher input costs decrease supply (shift left)
O
Other goods' prices: If a related good's price rises, producers may switch
T
Technology: Improvements increase supply (shift right)
T
Taxes and subsidies: Taxes decrease supply; subsidies increase supply
E
Expectations: If firms expect higher future prices, they may reduce current supply
N
Number of sellers: More sellers increase market supply

Increase vs. Decrease in Supply

Quantity Price
\( S_0 \)
\( S_1 \)
\( S_2 \)
Increase in Supply
Curve shifts right: at every price, more is supplied. Example: new technology lowers production costs.
Decrease in Supply
Curve shifts left: at every price, less is supplied. Example: a new tax raises production costs.

How to Analyze Supply Changes

1
Identify the change: Is the change in the good's own price, or in a non-price factor?
2
Price change → Movement along: If the good's price changed, slide along the existing curve.
3
Non-price factor → Shift: If a ROTTEN factor changed, shift the entire curve left or right.
4
Determine direction: Does the factor raise or lower costs / production? Higher costs → shift left. Lower costs → shift right.
5
State the result: Describe the new equilibrium effect: "Supply increases, so at the original price, there is a surplus, pushing price down."

Example 1: Technology Improvement

A new automated assembly line reduces the cost of producing smartphones. What happens to the supply of smartphones?

Example 2: Using the Supply Equation

The supply of widgets is given by \( Q_s = -20 + 15P \). Find the quantity supplied at \( P = 5 \) and determine the minimum price at which firms will supply any units.

Example 3: Tax on Producers

The government imposes a $2 per-unit tax on coffee producers. The original supply is \( Q_s = -10 + 20P \). What is the new supply equation?

Individual vs. Market Supply

Q Firm A
\( S_A \)
 + Q Firm B
\( S_B \)
 = Q Market
\( S_M \)

Common Mistakes to Avoid

✕ Confusing Supply with Quantity Supplied
A price change causes a movement along the curve (change in quantity supplied), not a shift in supply itself.
✕ Shifting the Wrong Direction
Higher costs shift supply left (decrease), not right. Think: "costs up, supply down."
✕ Mixing Up Supply and Demand Shifters
Consumer income and tastes shift demand. Input costs and technology shift supply. Don't confuse the two.

Supply Summary Table

Supply Increases (Shift Right) Supply Decreases (Shift Left)
Resource Costs Input prices fall Input prices rise
Technology Technological improvement Loss of technology (rare)
Taxes/Subsidies Government subsidy New tax on producers
Number of Sellers Firms enter market Firms exit market
Expectations Expect lower future prices Expect higher future prices

Question 1 of 5

According to the law of supply, what happens when the price of a good increases, ceteris paribus?

Question 2 of 5

If the cost of steel (a key input) rises sharply, what happens to the supply of automobiles?

Question 3 of 5

Given the supply function \( Q_s = -30 + 10P \), what is the quantity supplied when \( P = 7 \)?

Question 4 of 5

Which of the following would cause a rightward shift of the supply curve for wheat?

Question 5 of 5

A change in the price of a good causes which of the following?