Why is the

supply curve
the
way it is? (HL
ONLY)
IB AIMS

Assumptions underlying the law of supply (HL only)

● The law of diminishing marginal returns
● Increasing marginal costs

Page 54-57
Important to note In the supply section of our course, i.e. unit
2.2 you DO NOT have to draw cost curves
or production curves!

However, trying to communicate a deep

and genuine understanding of the law of
diminishing returns and increasing
marginal costs without those curves is
difficult!

Thankfully in unit 2.11 market power (HL

only) we do return to study these curves in
detail, phew!
IB AIM: distinguish between the short run and long
run in the context of production
Do you remember our factors of production?

In the short run at least one input is fixed and cannot be changed, i.e. the
firm faces restrictions, e.g. cannot move to a new factory so land is fixed

In the long run, however, all inputs can be changed, i.e. all inputs are
variable

The actual time frame depends on the type of business being discussed
 The supply curve is all Good and services are
So we can say the output
about businesses/firms made from the factors of
of firms depends on
making ‘stuff’ i.e. goods production; land, labour
inputs
and services capital
agree?
agree? agree?

In economics, the short

When economists say
FYI, in the long run all run means at least one
‘product’ they mean All inputs have costs,
factors of production are factor of production is
output; think of it as ‘the rent, wages, interest
variable fixed e.g. cannot be
produce made’
changed
agree?
ok?
ok?
ok?

The law of diminishing (marginal) You do NOT need to learn product

Increasing marginal costs provides
returns provides insight to product curves and costs curves at this stage of
insight to the supply curve the course. To do it properly would take
curves
ok? two weeks!
ok?
 marginal refers to changes on the “border”
eg: utility of eating one more chocolate, marginal utility
eg: cost of making one more unit, marginal cost
eg: efficiency of making one more unit, marginal productivity
IB AIM: Explain the law of diminishing marginal returns

‘...as more and more units of a variable input are added to one or more fixed
inputs, the marginal product of the variable input at first increases, but there
comes a point when it begins to decrease.’

or informally

Too many cooks spoil the broth

 “It follows then that the firm will be willing and
able to supply some quantity as long as the
price is enough to cover its costs. Therefore, we
can think of the supply curve as showing the
price that the firm is willing to accept to
produce one more unit of the good. In fact,
when marginal cost is increasing, the firm can
only produce more output if the price of the
good increases to cover the extra cost of each
extra unit produced. As a result, a portion of the
upward sloping part of the marginal cost curve
… is the firm's supply curve … The supply curve
begins at the point on the marginal cost curve
where the firm is making enough revenue so
that it is better off producing than shutting
down.”

Tragakes, 3rd Ed. (57)

The supply curve
Define/explained in words (i.e. without diagrams)

The law of diminishing returns Increasing marginal costs

The tendency for successive extra units of any input to The additional cost from increase in an activity. This
a productive process to yield smaller increases in is the addition to total cost resulting from a unit
output. If one input to a productive process rises, while
increase, or the addition to total cost per unit of the
other inputs are held constant, total output may increase; if
increase. Marginal cost may be in the short-run,
it does, the input has a positive marginal product. As
successive extra units of an input are applied, however,
when only some inputs can be changed, or long-run,
after a certain point output is likely to rise at a diminishing when all inputs can be adjusted.
rate.

In farming, for example, it is usually possible to get more

output from an acre by applying more labour, fertilizer, or
irrigation water. If marginal product did not diminish as
more of these inputs were used, the world could be fed on
the output of one acre of land, which is clearly impossible.
Law of Diminishing Returns

Watch this one first ⬆⬆⬆⬆

Advanced applications ➡➡
Increasing marginal costs

Watch this one first ⬆⬆⬆⬆