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The law of supply states that the quantity supplied will increase at the highest price. Therefore this creates a positively correlated supply graph. The reason for this is that there is more incentive to supply at high prices due to a larger profit margin. Also as the quantity supplied is increased more costs are incurred which are passed on to consumers.
If the price of the product was to increase then there would be an extension in supply (an increase in quantity supplied) due to the law of supply. Conversely if there was a fall in price then there would be a contraction in supply (a decrease in quantity supplied) also due to the law of supply.

Shifts would occur on a supply graph with non price factors. A positive shift would result in a rightward shift of the supply curve, with more supply available at the same price. An example of a positive shift could be due to a technological advancement, making production cheaper and more efficient. On the other hand a negative shift would result in a leftward shift of the supply curve, with less supply being available at the same price.

Determinants of Supply
Costs of Supplies – The higher the raw materials of producing a good, then the higher the firm’s costs. This will have to be passed onto consumers and there will be less supply available. This would create a negative shift.
Technology – Technological improvements can reduce the production cost creating a positive shift.
Indirect taxes and subsidies – Subsidies would create a positive shift, whereas taxes would create a negative shift.
Labour Productivity – If workers work harder then productivity increases, assuming they do not have a rise in wages then firms unit cost will be reduced therefore causing a positive shift.
Price Expectations – If a firm thinks that a goods price will rise in the future then they may delay supply until then.

Page last updated on 20/10/13