Supply: the supply curve and its shifts

Supply and the supply curve

Supply is the quantity of a good or service that producers are willing and able to sell at each price over a given period.

Diagram in words: price on the vertical axis, quantity on the horizontal. The supply curve (S) slopes upwards from left to right. Higher prices make supplying more profitable, attract new producers and cover the higher costs of producing extra output.

• A change in the good's own price: movement along S (extension when price rises, contraction when it falls).
• A change in any other factor: shift of S. Right (S1 to S2) = increase in supply; left = decrease.

Causes of a shift

• Costs of production: higher wages, raw material or energy prices shift supply left; lower costs shift it right.
• New technology: raises productivity and lowers costs, shifting supply right.
• Indirect taxes: raise costs for producers, shifting supply left.
• Subsidies: payments to producers lower costs, shifting supply right.
• Natural disasters (floods, droughts, earthquakes) destroy crops or capacity, shifting supply left; good weather shifts agricultural supply right.
• Others: the number of firms in the market, prices of other goods the firm could produce.

Specific and ad valorem taxes

• A specific (unit) tax is a fixed amount per unit, for example $1 per litre. The supply curve shifts vertically upwards by the tax, so the new curve is parallel to the old one.
• An ad valorem tax is a percentage of the price, such as a 20% sales tax or VAT. The tax per unit is larger at higher prices, so the new supply curve pivots: the gap between the curves widens as price rises.
• A subsidy per unit shifts supply vertically downwards by the subsidy (parallel for a specific subsidy).

The vertical distance between the two supply curves always equals the tax (or subsidy) per unit at that quantity.

Worked example

A drought destroys a large part of a country's coffee harvest. Explain the effect on the coffee supply curve and on the market.

1. A drought is a natural disaster that reduces the quantity producers can supply at each price.
2. The supply curve shifts left from S1 to S2.
3. At the original price there is excess demand, so price rises from P1 to P2.
4. Quantity traded falls from Q1 to Q2 as demand contracts.

Answer: Supply shifts left: price rises and quantity falls.

Check yourself

1. A rise in the market price of wheat, other things equal, causes
   • a rightward shift of the supply curve
   • a leftward shift of the supply curve
   • an extension of supply along the supply curve
   • a contraction of supply
   Show answer

   an extension of supply along the supply curve. The good's own price changes, so there is a movement along the curve.

2. Which would shift the supply curve of smartphones to the right?
   • A new technology that cuts production costs
   • A rise in wages in phone factories
   • A new indirect tax on smartphones
   • An earthquake that damages factories
   Show answer

   A new technology that cuts production costs. Lower costs mean more is supplied at each price.

3. An ad valorem tax is imposed. Compared with the original supply curve, the new supply curve
   • is parallel and higher
   • is parallel and lower
   • is steeper, with the gap between the curves widening at higher prices
   • is unchanged
   Show answer

   is steeper, with the gap between the curves widening at higher prices. A percentage tax is larger in money terms at higher prices.

4. A government subsidy of $3 per unit to producers shifts the supply curve
   • upwards by $3 at every quantity
   • downwards by $3 at every quantity
   • to the left
   • so that it becomes vertical
   Show answer

   downwards by $3 at every quantity. The subsidy lowers producers' costs by $3 per unit.

5. A specific tax shifts a supply curve so that, at every quantity, the new curve is $0.80 higher than the old one. What is the tax per unit?
   Show answer

   $0.80. For a specific tax the vertical distance between the curves equals the tax.

6. Explain why a supply curve usually slopes upwards.
   Show answer

   A higher price makes production more profitable, so existing firms are willing to supply more and new firms enter the market; a higher price also covers the rising costs of producing extra units.. Link the higher price to profit and costs.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.