Contents: 12 sections
Cambridge IGCSE Economics 0455
Syllabus points
- Define supply and explain the law of supply.
- Distinguish a movement along from a shift of the supply curve.
- Explain the causes of changes in supply.
The law of supply
Supply is the quantity of a good producers are willing and able to sell at each price, over a period of time.
The law of supply says that as price rises, quantity supplied rises, all other things being equal. So the supply curve slopes upwards.
Two reasons explain this:
- Profit motive. A higher price, with costs unchanged, means more profit per unit. Existing firms produce more, and new firms are attracted into the market.
- Rising costs. Producing extra units often costs more, overtime pay, older machinery brought back into use, so firms need a higher price to make those extra units worth producing.
Movement along versus a shift
The same rule as demand, and it is tested just as often:
| Cause | What happens | What it is called |
|---|---|---|
| The good's own price changes | Movement along the curve | A change in quantity supplied |
| Anything else changes | The whole curve shifts | A change in supply |
- Extension: a movement up the curve when price rises.
- Contraction: a movement down the curve when price falls.
The trap examiners set most often is an indirect tax. A tax is not a price change from the producer's point of view; it is a cost, so it shifts supply left. Students who treat it as a movement along, or as a demand-side change, lose the marks for the whole question.
Causes of a change in supply (shifts)
- Costs of production. Wages, raw materials, energy, rent. Higher costs shift supply left; lower costs shift it right.
- Technology. Better technology raises output per worker, shifting supply right.
- Indirect taxes. Raise costs → supply shifts left.
- Subsidies. Lower costs → supply shifts right.
- Number of firms. More producers in the market shifts supply right; firms leaving shifts it left.
- Weather and natural events. Especially important for farming, drought or flood shifts supply left.
- Prices of other goods. If a farmer can grow wheat or barley and the barley price rises, land moves to barley, so the supply of wheat shifts left.
Individual and market supply
Market supply is the total of all firms' supply at each price. This is why firms entering or leaving an industry shifts market supply even when no existing firm changes what it does.
Worked example
A government gives a subsidy to solar-panel manufacturers.
The subsidy lowers the cost of making each panel → at every price, firms are willing to supply more → the supply curve shifts right, from S1 to S2 → at the old price there is now more supply than demand → the price falls and the quantity traded rises.
A second case, to show the difference. Now suppose the government instead puts a tax on the panels.
Costs rise → supply shifts left → price rises and quantity falls.
Notice that in both cases the supply curve moved, because taxes and subsidies affect producers' costs, not what consumers are willing to pay.
Common exam mistakes
- Saying a price rise "increases supply", it increases quantity supplied.
- Treating an indirect tax as a demand-side change. It shifts supply.
- Shifting supply when the good's own price changed.
- Shifting supply for a change in consumer incomes or tastes; those are demand factors.
- Forgetting to label curves S1 and S2 when showing a shift.
Exam technique
Name the exact cause of a shift and its direction, "supply shifts left because energy costs have risen" rather than "supply shifts left".
Label axes price and quantity, label both curves, and mark the old and new equilibrium if the question asks about the market outcome.
When a question mentions a tax or subsidy, say clearly that it changes producers' costs, then shift supply. That one sentence shows the examiner you know which side of the market is affected.
Building an answer
Paper 2 rewards a chain of reasoning, not a list. These frames match the tariffs 0455 actually uses.
2 marks, "Define supply."
Supply is the quantity of a good that producers are willing and able to sell at each price over a given period of time.
One mark for quantity producers will sell at each price, one for willing and able. The phrase "willing and able" is what separates a full-mark definition from a half-mark one, because it rules out producers who would like to sell but cannot.
4 marks, "Explain two factors that could cause the supply of coffee to fall."
One factor is a rise in production costs. If the price of fertiliser rises, growing each sack of coffee costs more, so at any given price farmers find it less profitable and offer less. The supply curve shifts left.
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A second factor is poor weather. Drought in a growing region reduces the yield per hectare, so even farmers willing to sell more cannot, and supply shifts left again.
Two marks per factor: one for naming it, one for the chain that ends in supply shifts left. Naming four factors without explaining any of them scores two, not four.
6 marks, "Analyse the effect of a subsidy on the market for solar panels."
Open with the mechanism: a subsidy is a payment to producers that lowers their cost per unit.
Then the shift: at every price firms are now willing to supply more, so supply shifts right from S1 to S2.
Then the market outcome: at the old price supply now exceeds demand, so price falls to a new, lower equilibrium and the quantity traded rises.
Close by naming who gains: consumers pay less, producers sell more, and the government bears the cost.
A real market to quote
Nigerian cocoa, 2024. Fertiliser costs roughly doubled after global fertiliser prices spiked, and several growing regions had unusually heavy rainfall. Both are supply-side shocks pushing the same way, costs up, yields down, so supply shifted left and world cocoa prices reached record highs.
Two things make this worth memorising. First; it is a cost change and a natural change acting together, which is exactly what a 6-mark question likes. Second, the price rise came from the supply side, so any answer claiming consumers suddenly wanted more chocolate has the wrong side of the market.
Definitions the mark scheme accepts
| Term | Definition to learn |
|---|---|
| Supply | The quantity producers are willing and able to sell at each price over a period of time |
| Quantity supplied | The amount offered for sale at one particular price |
| Extension of supply | A movement up the supply curve caused by a rise in the good's own price |
| Contraction of supply | A movement down the supply curve caused by a fall in the good's own price |
| Subsidy | A payment by government to producers that lowers their costs per unit |
| Indirect tax | A tax on spending, collected by producers, which raises their costs per unit |
Check you have it
A firm has a high price elasticity of supply for its product. What does this indicate?
More questions on supply →Quick revision
- Supply = willing and able to sell at each price.
- The curve slopes up because of the profit motive and rising costs.
- Own price → movement along (quantity supplied). Anything else → shift (supply).
- Shifters: costs, technology, taxes, subsidies, number of firms, weather, other goods' prices.
- Indirect tax → supply left. Subsidy → supply right.
- Market supply is the total of all firms' supply, so entry and exit shift it.