Topic 2.2 Supply: state the law of supply, distinguish a change in quantity supplied from a change in supply, and identify the determinants that shift the supply curve.

What this topic is asking

Topic 2.2 introduces the sellers' side of a market: supply. The College Board wants you to state the law of supply, draw and read the supply curve, distinguish a change in quantity supplied (a movement along the curve) from a change in supply (a shift of the curve), and identify the determinants that shift supply. It mirrors the demand topic, and the same movement-versus-shift discipline applies.

The law of supply and the supply curve

The upward slope follows from rising marginal cost (Unit 3): producing extra units typically costs more at the margin, so producers will offer more only if the price rises to cover that cost. A higher price also makes the good more profitable than alternatives, drawing in additional sellers and resources.

Movement along versus a shift

As with demand, this is where the points are. "The price of wheat rose" is a movement along the supply curve (more wheat supplied), not a shift. "Fertilizer became cheaper" or "a drought struck" shifts the whole wheat supply curve.

The determinants that shift supply

A useful mnemonic is ROTTEN: Resource (input) costs, Other goods' prices, Technology, Taxes and subsidies, Expectations, Number of sellers.

• Resource (input) costs: higher input costs (wages, materials, energy) shift supply left; lower input costs shift it right.
• Other goods' prices in production: if a producer can switch to making a more profitable alternative, a rise in that alternative's price shifts supply of the original good left.
• Technology: a cost-reducing technology shifts supply right (more output at every price).
• Taxes and subsidies: a per-unit tax on producers shifts supply left; a per-unit subsidy shifts it right.
• Expectations: if producers expect a higher future price, they may withhold current output, shifting current supply left.
• Number of sellers: more sellers shift supply right; fewer shift it left.

A rightward shift is an increase in supply (more supplied at every price); a leftward shift is a decrease.

Try this

Q1. State the law of supply. [1 point]

• Cue. As a good's price rises, the quantity supplied rises, all else equal (a direct relationship).

Q2. The government places a per-unit tax on producers of a good. State the effect on supply and the direction of any shift. [2 points]

• Cue. A per-unit tax raises producers' costs, decreasing supply (the curve shifts left, or equivalently up by the tax).