The Theory of Supply

Just like with demand, where it only became effective if it was backed up with the ability to pay, supply is defined as the willingness and ability of producers to supply goods and services onto a market at a given price in a given period of time. In theory, at higher prices a larger quantity will generally be supplied than at lower prices, ceteris paribus, and at lower prices a smaller quantity will generally be supplied than at higher prices, ceteris paribus.

The determinants of supply

• Prices of other factors of production.
• Technology.
•  Indirect taxes and subsidies.
• Labour productivity.
•  Price expectations
•  Entry and exit of firms to and from an industry. 

 Movements along a supply curve

A movement along a supply curve only occurs when the price changes, ceteris paribus. In other words, the price changes but the other non-price determinants remain constant. The diagram below shows that a price rise will cause an extension up the supply curve, whilst a price fall will cause a contraction back down the supply curve.