(HL Economics series) Top 3 misconceptions in Topic 2: Supply
Welcome back to our lost and found series where we cover the misconceptions that we as students faced and help them get back on the right track! Sadly, some of us did not realise we had these misconceptions till nearing the end of our IB journey. We hope this guide helps prevent possible panic near the examinations where you realise what you have been studying was wrong the whole time.
We hope that you have benefited from our first lesson of the series for the topic: Demand. This week, we will be looking at Supply instead!
Without further ado, let’s get in to it!
1. Getting confused between related goods when looking at non-price determinants of Demand and Supply.
When studying for the chapter, Demand, you would have realized that changes in prices of substitute goods and changes in prices of complementary goods cause a change in demand.
In the chapter of Supply, a non-price determinant that seems familiar shows up. This is changes in prices of related goods. Wait, aren’t substitutes and complements also related goods?
For Supply, the related goods they are referring to are NOT substitutes and complements but instead joint supply and competitive supply.
In brief, competitive supply refers to goods that compete for the use of the same resources and joint supply refers to goods that are derived from a single product.
This is heavily contrasted to substitutes which are goods that satisfy the same need and complements which are goods that are used together.
2. The vertical supply curve
How do we interpret the vertical supply curve?
The way I remember it is that Quantity supplied does not change even if price increases to an infinite extent. In the diagram, you will notice that changing price from P1 to P2 still results in the same Quantity supplied, Q1.
Think about it this way: Even if you wanted to pay $1,000,000,000 to anyone, he/she will never be able to make another Mona Lisa. Yes, he/she can probably paint something that looks similar or is almost identical, but it will never be the original one.
3. Explaining why the supply curve slopes upwards
Students often get confused here because they remember how the explanation for the Demand curve isn’t so simple as the cheaper the good, the more people will buy. (If you’re wondering what I’m talking about, check out Topic 1 in the lost and found series).
For the Supply curve explanation, its much simpler really.
The higher the price, the higher the firm’s profits and thus there is more incentive to produce more output. That’s not all if you want to make your answer concrete. You should also explain the flip side which is: The lower the price, the lower the profitability and thus firms have an incentive to produce less. But that’s still not all. You should wrap up by stating that this causes a positive causal relationship between price and quantity supplied thus the upward sloping supply curve.
We hope this has helped you understand some of the common pitfalls students like yourself might have. If you know someone who doesn’t listen in Economics class, it might be worthwhile to send this resource to him/her. You might save him/her from a catastrophe. Then he might owe you a meal.
Win-win?
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Check out iblounge.org for more information!n the flip side which is: The lower the price, the lower the profitability and thus firms have an incentive to produce less. But that’s still not all. You should wrap up by stating that this causes a positive causal relationship between price and quantity supplied thus the upward sloping supply curve.
