Using diagrams and example explain the meaning of the law of supply as well as distinguish

between movements along and shifts in a supply curve (10)

Law of supply states that there is a positive causal relationship between Price and Quantity of
supplied over a particular time period, ceteris paribus. Whenever the price of most goods
changes, according to the law of supply, the quantity supplied also changes, resulting in a
movement along the supply curve - contraction or extension. If non-price factors of supply cause
for the supply to change, such as changes in the costs of production, changes in price of
related goods or changes in government intervention, it results in a shift of the supply curve,
signifying a supply increase or supply decrease.

Assuming that the decisions made by firms are rational and with the goal of maximizing their
own personal benefit, when the price of a good increases, it serves as a signalling function for
firms, which describes how, when a price increases, it tells firms to start re-allocating resources
to produce more of that good and thereby increase the supply of it to the product market. If firms
take the signalling function and use it as an incentive function, which describes that firms use
the higher price as a motivation to produce more, firms will be able to earn more revenue with a
higher chance for profit if they increase their supply. This positive causal relationship is shown
on the diagram below. (see fig. 1) When the price of coca-cola increases from P to P1, there will
be a movement along the supply curve of coca cola from A to B which will expand the quantity
demanded from QD to QD1 by the value of (QD1-QD).

In the case of a change in a non-price determinant of supply, such as a change in the costs of
production or a change in price of a related good, supply of the original good may be subject to
change. If the price of a competitive good to coca cola such as pepsi increases, the supply for
that product will increase due to the incentive function of the higher price, ceteris paribus.
Meanwhile the supply of the original product, coca cola, decreases. This is shown in the
diagram below by a shift inwards of the supply curve of coca cola from S to S1, leading to a
decrease in supply by (QS-Q1).
The difference between the movements and a shift on the graph of the law of supply is therefore
determined by whether the factor is a price factor or non-price factor. The changes in price
factors result in a movement along the supply curve, resulting in a extension or contraction,
while the changes in non-price factor result in a shift of the supply curve, resulting in an increase
or decrease of supply.