Business Economics · How competitive markets operate

Supply Curve and the Law of Supply Explained

Updated 11 October 2026 · Fact-checked

Supply is the quantity of a good firms are willing and able to offer at each price. The law of supply says that, other things equal, a higher price raises quantity supplied. To solve questions, separate price changes (movement along the curve) from changes in costs, technology or taxes (shifts of the curve).

Understand Supply and Law of Supply

Supply is how much of a good firms are willing and able to sell at each possible price, over a given period. It is not one number. It is a whole schedule of prices and quantities.

The law of supply says: if the price of a good rises and everything else stays the same, the quantity supplied rises. Firms respond to higher prices because each extra unit is more profitable. Also, in the short run, marginal cost usually rises with output, so a firm needs a higher price to cover the cost of producing more. The supply curve therefore slopes upward, with price on the vertical axis and quantity on the horizontal axis.

The key skill is separating two ideas. A change in the good's own price moves you along the same curve. This is a change in quantity supplied. A change in any other determinant of supply moves the whole curve. This is a change in supply. Determinants include input costs, technology, taxes and subsidies, prices of related goods, the number of firms, and expectations. Weather matters for farm goods.

Costs and technology work through profit. Higher input costs (wages, raw materials, energy) cut profit at every price, so supply falls and the curve shifts left. Better technology lowers the cost of each unit, so supply rises and the curve shifts right. An indirect tax per unit adds to cost, so the curve shifts up (left) by the amount of the tax. A subsidy per unit reduces cost, so the curve shifts down (right) by the amount of the subsidy.

The curve reads in two ways. Read across: at a given price, how much will firms supply? Read up: what is the minimum price needed to make firms supply a given quantity? The second reading explains why a per-unit tax shifts the curve vertically by the tax amount.

Key rules to remember

Law of supply: Price ↑ → quantity supplied ↑ (ceteris paribus); Holds for the usual upward-sloping supply curve. It is a movement along the curve, not a shift.
Linear supply function: Qs = a + bP, with b > 0; A change in a (the intercept) shifts the curve. A change in P moves you along it. Check which variable has changed.
Inverse supply function: P = (Qs − a) ÷ b; Use this form to add a per-unit tax or subsidy.
Per-unit tax shift: New supply price = old supply price + t; The curve shifts vertically up by t, which is a leftward shift. The price paid by buyers includes the tax.
Per-unit subsidy shift: New supply price = old supply price − s; The curve shifts vertically down by s, which is a rightward shift.
Market supply: Market Qs = sum of each firm's Qs at the same price; Add quantities horizontally at each price. Do not add prices.

How to solve Supply and Law of Supply questions

Use this method for any question on supply, whether it is a graph, a short explanation or a calculation.

1Identify the good and the market. State the price on the vertical axis and the quantity on the horizontal axis.
2Ask what changed. If it is the good's own price, it is a movement along the curve. If it is anything else, it is a shift.
3If it is a shift, name the determinant (input cost, technology, tax, subsidy, related goods, number of firms, expectations, weather).
4Decide the direction. Anything that raises profit at every price shifts supply right. Anything that cuts profit shifts it left.
5For a tax or subsidy, shift the curve vertically by the amount per unit. For a function Qs = a + bP, rewrite as P = (Qs − a) ÷ b, then add the tax or subtract the subsidy.
6Draw and label the old curve S1 and the new curve S2. Mark the original and new prices and quantities.
7State the result in words: say 'supply increases' or 'quantity supplied rises' using the correct term, and give the reason.

Quickest way: Shift or movement in three questions

When to use it: Use this in MCQs or when you have only a minute for a short written part.

Is the cause the good's own price? If yes, it is a movement along the curve. Stop.
If no, does the cause make production cheaper or more profitable? If yes, the curve shifts right. If it makes production costlier, it shifts left.
For a per-unit tax or subsidy, think vertically: tax moves the curve up by t, subsidy moves it down by s. Then translate to left or right.

Common mistakes in Supply and Law of Supply

Calling a change in price a 'change in supply'.
In everyday speech, 'supply' and 'quantity supplied' mean the same thing.
Fix: Use 'change in quantity supplied' for price-driven movements along the curve. Reserve 'change in supply' for shifts caused by other factors.
Shifting the curve when the good's own price changes.
Students see price as a cause of everything and forget that price is already on the axis.
Fix: The own price never shifts its own supply curve. It only moves you along it.
Shifting supply the wrong way for a tax or subsidy.
Up and left, or down and right, feel like opposite things.
Fix: Think vertically first. A tax raises the price firms need, so the curve moves up. Up is the same as left. A subsidy moves it down, which is right.
Adding prices instead of quantities to get market supply.
Students sum along the wrong axis.
Fix: Fix a price, read each firm's quantity, and add the quantities.
Treating a fall in input cost as a movement along the curve.
Students think a lower cost means a lower price, so they move down the curve.
Fix: Input costs are determinants. They shift the curve right. The price changes only after the market adjusts.
Ignoring 'other things equal'.
Students forget that the law holds only when all other determinants are constant.
Fix: State the assumption in your answer. If several factors change, treat each one separately and then combine the effects.

Worked examples

Example 1

The supply function for a good is Qs = −20 + 4P, where P is in ₹ and Qs is in thousand units. (a) Find the quantity supplied at P = ₹10 and at P = ₹15. (b) The government imposes a tax of ₹2 per unit on producers. Find the new supply function in terms of the price buyers pay, and the quantity supplied at a buyer price of ₹15.

Show the solution

(a) At P = 10: Qs = −20 + 4 × 10 = 20 thousand units.
At P = 15: Qs = −20 + 4 × 15 = 40 thousand units. This is a movement along the curve, because only price changed.
(b) Producers receive the buyer price minus the tax. Let Pb be the buyer price. Producer price = Pb − 2.
New supply: Qs = −20 + 4(Pb − 2) = −20 + 4Pb − 8 = −28 + 4Pb.
At Pb = 15: Qs = −28 + 60 = 32 thousand units.
Check: producers receive ₹13, and −20 + 4 × 13 = 32. This agrees.

Answer: (a) 20 and 40 thousand units. (b) New supply is Qs = −28 + 4Pb, so 32 thousand units at a buyer price of ₹15. The curve shifts left, since 32 is less than the original 40 at ₹15.

Example 2

Explain, with reference to the supply curve, the effect on the market for a manufactured good of (i) a rise in the price of the good, and (ii) a new technology that cuts the cost of production per unit.

Show the solution

State the assumption: other things are equal and the supply curve slopes upward.
(i) A rise in the good's own price makes each extra unit more profitable. Firms offer more. This is a movement up along the same supply curve, so quantity supplied increases. Supply itself does not change.
(ii) A new technology lowers the cost per unit. At every price, profit per unit is higher, so firms are willing to supply more.
The whole curve shifts right from S1 to S2. This is an increase in supply.
At the original price, the quantity supplied is now higher. Equivalently, firms will supply any given quantity at a lower price.
Conclude by naming the two terms: (i) is a change in quantity supplied; (ii) is a change in supply.

Answer: (i) A movement along the curve: quantity supplied rises. (ii) A rightward shift of the whole curve: supply increases because costs fall.

Exam tips

Examiners often reward correct vocabulary. Write 'change in quantity supplied' or 'change in supply' exactly, and never swap them.
In graph answers, label both axes, the old and new curves (S1, S2) and the old and new equilibrium points. Unlabelled diagrams lose marks.
For tax and subsidy questions, state whether the amount is per unit. A per-unit amount gives a parallel vertical shift in the curve.
In MCQs, check whether the cause is the good's own price before looking at the options. This removes most traps.
In written answers, give the reason for each shift in a sentence about costs or profit. A bare 'curve shifts right' earns little.

Practice questions from How competitive markets operate

Supply and Law of Supply in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Supply and Law of Supply: frequently asked questions

What is the difference between a change in supply and a change in quantity supplied?

A change in quantity supplied is a movement along the same supply curve and is caused only by a change in the good's own price. A change in supply is a shift of the whole curve and is caused by other determinants such as costs, technology, taxes or subsidies.

What are the determinants of supply?

The main ones are input costs, technology, taxes and subsidies, prices of related goods, the number of firms in the market, and expectations about future prices. For agricultural goods, weather also matters. Each one changes profit at every price and so shifts the curve.

How do taxes and subsidies shift the supply curve?

A per-unit tax raises the cost of supply, so the curve shifts up by the tax, which means to the left. A per-unit subsidy lowers the cost, so the curve shifts down by the subsidy, which means to the right.

Why does the supply curve slope upward?

Higher prices make extra output more profitable. In the short run, marginal cost usually rises as output rises, so firms need a higher price to cover it. Together these give an upward-sloping curve.