AP® Macroeconomics review sheet from Aim for Five (aimforfive.com/macro/units/1/1-5)
Unit 1 · Topic 1.5
1.5 Supply
Supply shows how much of a good producers are willing and able to sell at each price. The supply curve slopes upward because a higher price makes producing more worthwhile. As with demand, a change in the good's own price moves along the curve, and every other factor shifts it.
Key terms
- law of supply
- quantity supplied
- change in supply
- input prices
- technology
The law of supply
The law of supply says price and quantity supplied move in the same direction, holding everything else constant. If the price of strawberries rises, farmers plant more and sell more.
On a graph with price on the vertical axis and quantity on the horizontal axis, the supply curve (S) slopes upward from left to right.
Why? A higher price means each unit brings in more revenue, so it covers the higher cost of producing extra units (overtime pay, less suitable land, older machines). It also draws producers away from other goods they could make.
Quantity supplied vs. supply
A change in quantity supplied is a movement along the curve, caused only by a change in the good's own price.
A change in supply is a shift of the whole curve. An increase in supply shifts it right (more offered at every price); a decrease shifts it left. Think of a decrease in supply as the curve moving up, because producers now need a higher price for each quantity.
A concrete case: at $4 a loaf, a town's bakeries offer 500 loaves a day. If the price rises to $5 and they offer 600, that's an increase in quantity supplied, a move up along S1. If flour gets cheaper and they now offer 650 loaves at $4 and more at every other price too, that's an increase in supply: the curve shifts from S1 right to S2.
What shifts supply
| Determinant | Change that increases supply (shift right) |
|---|---|
| Input prices | Wages, raw materials or energy get cheaper |
| Technology | A new machine lets a factory make more with the same inputs |
| Taxes and subsidies | The government cuts a tax on producers or gives them a subsidy (a payment per unit) |
| Prices of other goods the firm could make | Soybean prices fall, so farmers switch fields to corn and corn supply rises |
| Producers' expectations | Producers expect the price to fall later, so they sell more now |
| Number of sellers | New firms enter the market |
Expectations work backward from what you might guess
If producers expect a higher price in the future, they hold some goods back to sell later, so supply today decreases (shifts left). Buyers react the opposite way: expecting a higher price, they buy more today. Keep the two straight.
In macro, input costs show up again in short-run aggregate supply (3.3): when wages or oil prices rise across the whole economy, SRAS shifts left for the same reason a single market's supply curve does.
Worked examples
Try each one yourself first, then open the solution.
- Example 1
Naming the shift
In the market for pizza, decide whether each event changes supply or quantity supplied, and which way: (1) the price of cheese rises; (2) the price of pizza rises; (3) the city gives pizzerias a $1 subsidy per pizza; (4) pizzerias expect pizza prices to rise sharply next month (assume pizza can be stored frozen).
Show the solutionHide the solution
- Step 1: (1) Cheese is an input. Higher input prices raise costs, so supply decreases: shift left.
- Step 2: (2) Pizza's own price changed, so it's a movement up along the supply curve: quantity supplied increases.
- Step 3: (3) A subsidy lowers producers' effective cost per pizza, so supply increases: shift right.
- Step 4: (4) Producers expecting a higher future price hold back some output now, so supply today decreases: shift left.
Answer: (1) Supply decreases (left). (2) Quantity supplied increases (movement along S). (3) Supply increases (right). (4) Supply today decreases (left).
Common mistakes
- Shifting the supply curve because the good's own price changed. That's a movement along the curve.
- Shifting supply when buyers' income or tastes change. Those are demand shifters; supply stays put.
- Getting expectations backward. Producers expecting a higher future price decrease supply today.
- Reading "shift up" as an increase. An upward (leftward) shift of supply is a decrease.
On the exam
- Questions often describe a cost change, a new technology or a tax and ask which way supply shifts. Ask: does this make producing each unit cheaper (right) or costlier (left)?
- The idea that higher input costs shift supply left is the base for SRAS shifts in 3.3, which the free-response section tests often.
Connected topics
Videos
Check yourself
4 questions on 1.5 Supply. Pick an answer to see if you got it, and why.
The price of cocoa beans, a key input in chocolate production, increases. Which of the following is most likely in the market for chocolate bars?
A new machine allows bicycle makers to build bicycles with less labor. In the market for bicycles, this change will most likely
Which of the following best describes the law of supply?
A farmer can use the same land to grow either wheat or soybeans. If the market price of soybeans rises sharply, what is the most likely effect in the market for wheat?
0 of 4 answered