Supply curve equation

The market supply curve shows the combined quantity supplied of goods at different prices.
The market supply curve is the horizontal sum of all individual supply curves.

Linear Supply curve

A linear supply curve can be plotted using a simple equation P

= a + bS

a = plots the starting point of the supply curve on the Y-axis intercept.
b = slope of the supply curve.

P = 30+0.5(Qs)

Inverse supply curve

This plots the same equation in terms of Qs

2(P-30)= Qs

Example of linear supply curve

P = 30+ 0.5(QS)

Supply curve equation

QP
030
1035
2040
3045
4050
5055
6070

 

Shift in slope of supply curve

P = 30+ 1.2(QS)

Supply equation2

P=30+1.2(Qs)

QP
030
1042
2054
3066
4078
5090

 

Shift in a – Shift in the supply curve

Shift in supply curve

P = 0 + 1.2 (Qs) shifts the supply curve downwards so it starts at the 0,0.

Why is supply curve generally upward sloping?

Generally, a higher price encourages firms to produce more. This is for two reasons.

  • A higher price makes the good more profitable to produce.
  • In the short term, the cost of production (marginal cost) is affected by the law of diminishing marginal returns. Increasing output with capital fixed leads to a point where marginal costs rise rapidly, so the firm needs a higher price to compensate for higher cost of production

Effect of tax on supply curve

P = 0 +2Q

A specific tax will shift supply curve upwards by £5. After tax. The supply curve will be

P = 5+2Q

An Indirect tax will shift supply curve upwards by a certain percentage. e.g. VAT = 20%

P = 0+2Q. After VAT will be P = 0+(2Q * 1.2)

Effect of Subsidy on supply curve

Suppose we have supply curve

P = 30+0.5Q

After subsidy of £10

P = 20+0.5Q

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