Demand, Supply and How Markets Work: Question 3

Worked solution

Part (a): The law of supply

The law of supply states that, other things being equal (ceteris paribus), the higher the price of a good, the greater the quantity that producers are willing and able to supply, and the lower the price, the smaller the quantity supplied. This gives the supply curve its upward slope.

Part (b): A movement along the supply curve

Here, the only thing that changes is the price of a ceramic mug itself; the cost of clay, the price of glaze, and every other influence on supply are explicitly held constant. Because the reaction of studios is caused entirely by the mug’s own price rising, this is a movement along the existing supply curve, not a shift of it.

Since price has risen and studios respond by supplying more mugs, this particular movement is called an extension in supply.

Part (c): A shift of the supply curve

This time the price of a mug has not changed. Instead, the cost of clay, a raw material used in production, has risen. A change in the cost of production is a non-price determinant of supply, so it shifts the whole supply curve rather than moving studios along it.

Reasoning through the effect:

1. Clay becomes more expensive, so the cost of making each mug rises.
2. At any given selling price, mugs are now less profitable to produce than before.
3. Studios are therefore willing and able to supply fewer mugs at every possible price.

This means the supply curve for ceramic mugs shifts to the left: supply has decreased.

Final answers

• (a) Law of supply: quantity supplied rises as price rises (and falls as price falls), other things being equal.
• (b) A movement along the supply curve (an extension in supply), because only the mug’s own price changed.
• (c) The supply curve shifts to the left (supply decreases), because the rise in the cost of clay makes production less profitable at every price.