IB Economics Supply

Why Is My Phone Getting More Expensive? A Story About Supply

Target Question:

What are the non-price determinants of supply in IB Economics?

Secondary target Question:

What is the law of supply in IB Economics?

Tertiary target question:

What is the difference between a movement along and a shift of the supply curve?

Panic at the Tech Store

It's 2026. You've been saving up for a new laptop, or maybe you want an upgrade to your phone. You walk into your favourite tech retailer - or open the website - and the price is just... expensive. Noticeably, painfully, higher than what you expected. Your mate got the same model six months ago for £150 less. What on earth happened?

Here's what happened. The entire planet collectively decided to build artificial intelligence at the same time. Tech giants - Google, Microsoft, Amazon, Meta - started pouring hundreds of billions of pounds into AI data centres. And those data centres need millions of memory chips. The result? A global memory chip shortage so severe that analysts nicknamed it "RAM-mageddon."

The demand for specialised AI chips surged so fast that the three companies who make the bulk of the world's memory - Samsung, SK Hynix, and Micron - couldn't keep up. They started diverting their production capacity away from everyday consumer chips (the stuff inside your laptop and phone) and towards the high-end AI chips that data centres would pay anything for. DRAM prices reportedly rose by over 170% through 2025. Memory that cost £100 in late 2024 could set you back over £250 by early 2026. The CEO of one major semiconductor firm called it "the most significant disconnect between demand and supply I've experienced in my 25 years in the industry."

Your expensive laptop? That's supply in action. And today we're going to make complete sense of why this happens - and every other scenario where goods and services suddenly become harder, or easier, to get hold of.

Right - So What Is Supply?

Supply refers to the amount of goods or services that businesses are prepared and capable of selling at a particular price within a defined timeframe.

Notice the two words: prepared (willing) and capable (able). Both are relevant. A firm might be willing to sell a million chips - but if the factory capacity isn't there, capability is the constraint. That distinction is already telling you something real about RAM-mageddon (the global shortage of computer memory (RAM) and NAND storage chips, anticipated to peak in 2026).

The Law of Supply states that as the price of a product increases, the quantity supplied also rises - assuming all other factors remain constant (your old friend ceteris paribus).

This makes sense: if someone tells you they'll pay you £100 per hour to wash cars instead of £10, you're going to wash a lot more cars. Firms behave the same way.

On a diagram, the supply curve is shown as an upward-sloping line, running from bottom-left to top-right. Price on the vertical axis (P), quantity supplied on the horizontal axis (Q). As price rises, quantity supplied rises. As simple as that.

IB Economics Key Definition

Supply = the amount of a good or service that producers are willing and able to offer for sale at each price level, over a given time period, ceteris paribus.

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But Why Do Firms Supply More at Higher Prices?

Two reasons:

First: profit margins. Firms (in most markets) are assumed to be profit maximisers. If the price of their product rises, every unit they sell earns them more money. More revenue, potentially more profit. So the rational response? Make more of it.

Second: new firms enter. When prices in a market are rising, that market becomes attractive. Higher prices mean higher potential profits, which is basically a flashing neon sign saying "come and sell stuff here." New businesses enter the industry, adding their supply on top of existing producers. The total amount available in the market grows.

IB Economics Real-life example: Think back to the energy market. When Russia invaded Ukraine in 2022 and gas prices spiked, suddenly everyone from governments to private investors was throwing money at renewable energy, LNG terminals, and alternative fuel sources. Higher prices signalled opportunity, and suppliers responded. That's the law of supply doing what it has to do.

HL Only: The Maths - Marginal Cost

IB Economics Higher Level Content

If you're SL, you can skip this section and jump straight to CISTERN. If you're HL, pay attention - this is where it gets more interesting.

The law of supply is built on a concept called Marginal Cost (MC).

Marginal cost (MC) is simply the cost of producing one more unit of output. The formula is:

MC = ΔTC ÷ ΔQ

Where ΔTC = change in total cost, and ΔQ = change in total output (quantity).

So if producing 101 units costs you £5 more than producing 100 units, your marginal cost of that 101st unit is £5.

Why is this relevant for supply? Because firms will only produce an extra unit if the price they can charge is at least equal to (or greater than) what it costs them to make it.

So, increasing marginal costs occur when the cost of each additional unit of output rises - typically as a result of diminishing marginal returns in the short run.

If your marginal cost is rising, you need a higher price to justify the extra production. This is precisely why the supply curve slopes upward: as output increases, marginal costs generally rise, so firms demand a higher price to keep producing.

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The Law of Diminishing Marginal Returns

Now, why do marginal costs rise in the first place? That's down to the Law of Diminishing Marginal Returns (DMR).

IB Economics Real-life example: Imagine you run a food truck. You've got one grill and one chef. Add a second chef - great, output doubles. Add a third - still helpful, maybe they handle prep. Add a fourth, a fifth, a sixth... and suddenly they're all getting in each other's way, bumping elbows, dropping things, and your output per extra person starts to fall. You're still producing more overall, but each additional worker is contributing less than the last.

This is diminishing marginal returns: when you add extra variable factors of production (like labour) to fixed factors (like your grill and the truck), the marginal return - the extra output - eventually starts to decline. And when each extra worker produces less, but still needs paying the same wage, your cost per unit rises. Hence: rising marginal costs.

IB Economics Key Point: DMR only applies in the short run, when at least one factor of production is fixed. In the long run, all factors are variable - you can get a bigger truck, more grills, a second location - and the constraint disappears.

So the chain is:

More production → DMR kicks in → marginal costs rise → firms only agree to increase output if prices rise to compensate → upward sloping supply curve. The pieces fit.

What Moves the Supply Curve? CISTERN

Here's where examiners love to see you have control over IB Economics. Supply doesn't just respond to price. A whole range of non-price determinants can shift the entire supply curve left or right.

Shift right = supply increases (more is supplied at every price)
Shift left = supply decreases (less is supplied at every price)

There's a handy acronym to remember all of them: CISTERN.

IB Economics The CISTERN Acronym

C - Costs of factors of production
I - Indirect taxes
S - Subsidies
T - Technological change
E - Expectations of future prices
R - Related goods (joint or competitive supply)
N - Number of firms in the industry

Let's go through each one with real examples, because knowing the theory without being able to apply it is like knowing all the words to a song but singing them in the wrong order. It's just noise.

C - Costs of Factors of Production

Factors of production are the inputs a firm uses to produce things: land, labour, capital, and entrepreneurship. When the cost of any of these rises, production becomes more expensive - and supply falls. The supply curve shifts left.

IB Economics Real-life example: The UK energy market is the perfect case study here. During the post-COVID period and especially following Russia's invasion of Ukraine in 2022, energy costs for UK manufacturers went through the roof. Gas prices spiked, electricity bills for businesses hit record highs. For energy-intensive industries - steel, ceramics, chemicals, food processing - energy is a major factor of production. Higher energy costs meant higher costs of producing every unit. Many firms cut output or exited the market entirely. Supply shifted left.

Even today, UK industrial electricity prices remain among the highest in Europe - higher than in all but one EU state (Germany). That's a persistent leftward pressure on the supply curves of British manufacturers. Something worth flagging in an exam when you're asked about UK competitiveness.

I - Indirect Taxes

Indirect taxes are taxes levied on goods and services rather than on income. Think VAT, or the UK's sugar levy, or the duty on fuel. The key thing to grasp is that indirect taxes are imposed on producers and suppliers, not directly on consumers - which means they raise the cost of supplying a product.

When indirect taxes go up, production costs rise, and the supply curve shifts left. The tax effectively acts like any other cost increase: firms either absorb it (squeezing margins) or pass it on to consumers through higher prices. In practice, it's usually a bit of both.

Check government Intervention in markets in regulation & deregulation page

IB Economics Common Misconception
Students sometimes write: "An increase in taxes causes demand to fall, ceteris paribus." Be careful here. It depends on the type of tax. A rise in direct taxes (like income tax) reduces disposable income, which can cause demand to fall. But an increase in indirect taxes is imposed on producers - it affects supply, not demand directly. Different side of the market, different effect. Don't mix them up in an exam. Examiners will penalise you.

S - Subsidies

A subsidy is essentially the opposite of a tax - it's financial support from the government to producers, designed to lower their costs of production and encourage more output. When a subsidy is introduced, production becomes cheaper, profit margins widen, and the supply curve shifts right.

IB Economics Real-life example: The EU's Common Agricultural Policy (CAP) is one of the outstanding real-world examples of subsidies at scale. In 2023 alone, the EU spent over €38 billion in direct payments to farmers. That's not a typo. €38 billion. This represents roughly a quarter of the entire EU budget. The purpose? To lower farmers' effective production costs, keep food supply stable, and prevent European farms from going under when global prices fall.

The results are exactly what economics would predict: higher supply of agricultural products across the EU than would exist if farmers were left entirely to market forces. The subsidy effectively pulls the agricultural supply curve to the right. Some economists love this; others argue it distorts markets and props up inefficient producers. A debate worth knowing for your essays.

T - Technological Change

New technology almost always makes production cheaper and more efficient. Machines replace labour in some tasks, processes become faster, less waste is generated. When technology improves, firms can produce the same quantity at lower cost - or more quantity at the same cost. The supply curve shifts right.

IB Economics Real-life example: The semiconductor industry is a brilliant ongoing example. Each new generation of chip-making technology allows manufacturers to etch ever-smaller transistors onto silicon wafers, producing more powerful chips with the same (or less) materials. This is why your phone today is dramatically more powerful than the most expensive computers of 20 years ago, while also being cheaper in real terms.

AI itself is now being used to accelerate chip design, with AI-driven engineering tools reportedly cutting design timelines dramatically. Technology feeding back into the technology supply chain.

E - Expectations of Future Prices

Producers aren't just responding to today's prices - they're constantly making bets on the future. If a producer expects prices to rise significantly in the near future, they have an incentive to stockpile goods now and sell them later at the higher price. Current supply falls (leftward shift) as goods are held back from the market.

Conversely, if producers fear that prices will fall - maybe because a new competitor is entering, or because demand is expected to drop - they'll try to sell as much as possible now, before prices deteriorate. Current supply increases (rightward shift).

IB Economics Real-life example: The AI chip market is a live example of the other direction. Chipmakers are investing billions right now - Samsung, SK Hynix, and Micron are all racing to expand production capacity - because they fully expect AI-driven demand (and prices) to remain elevated for years. That expectation is driving investment decisions and, eventually, a future rightward shift in supply. Future supply, in other words, is being shaped by current expectations. Economics in slow motion.

R - Related Goods: Joint Supply and Competitive Supply

This one trips some of my students up, so pay attention. Supply can be affected by what else a firm is producing, because resources are often shared or the production processes are linked.

Joint supply is when producing one good automatically results in the production of another.

Joint supply occurs when the production of one good automatically leads to the production of another as a by-product - for example, beef and leather, or oil and petroleum by-products.

The typical IB Economics examples: produce beef → also produce leather. Produce oil → also produce petroleum by-products. Produce milk → also produce the raw inputs for cheese and butter. If the supply of beef increases (perhaps because beef prices rose), the supply of leather increases simultaneously - the supply curve for leather shifts right, even though the price of leather hasn't changed.

Competitive supply is when firms have limited resources and must choose between producing one product or another.

So, competitive supply exists when a producer must choose between producing one good or another due to limited shared resources - producing more of one necessarily reduces the output of the other.

Think about a tech manufacturer deciding whether to dedicate their machinery and factory floor to making smartphones or smartwatches. If they make more smartphones, they necessarily produce fewer smartwatches - limited capacity, shared resources. The supply of one restricts the supply of the other.

IB Economics Real-life example: AI chips are a good example you can use. Chipmakers are reallocating factory capacity - wafers, engineers, machines - away from consumer-grade memory towards high-end AI chips. It's competitive supply in textbook form: more AI chips means less laptop memory. That's RAM-mageddon explained through IB Economics.

N - Number of Firms in the Industry

This one's really simple. More firms supplying a product = more total supply available in the market = the supply curve shifts right. Fewer firms = supply shifts left.

If a market becomes profitable, new competitors enter (attracted by those higher prices), and market supply expands. If costs rise, regulations tighten, or conditions become unfavourable, firms exit and market supply contracts.

The global memory chip market is an interesting counter-example here. Despite massive demand, the number of firms capable of producing cutting-edge chips is essentially down to three: Samsung, SK Hynix, and Micron. Building a new semiconductor fab takes years and costs billions - it's not a market you can just wander into. This extreme concentration of supply is one reason the shortage has been so persistent. There are no spare firms waiting in the wings to ride in and boost supply quickly.

Movements vs Shifts: The Distinction That Can Cost You Marks

This is a typical IB Economics exam challenge, and it's worth remembering.

Movement along the supply curve = caused by a change in price. When price rises, quantity supplied rises. The firm moves up the same curve. This is called an expansion of supply (or contraction when price falls). The curve itself doesn't move - you just move along it.

Shift of the supply curve = caused by a change in any non-price factor (CISTERN). The whole curve moves left or right. At every price level, firms are now willing to supply a different quantity than before.

If a question mentions technology improving, costs falling, a new subsidy, or a change in the number of firms - you're drawing a shift. If the question is about price changing - you're drawing a movement along the existing curve.

So, a shift in supply is caused by changes in non-price factors. A movement in supply is caused only by changes in price.

The Rising Demand Trap (Read This Carefully)

IB Economics Misconception: "Rising demand for a product will cause an increase in the supply of the product, which will probably mean lower prices."

This is wrong - and it's a tricky one. Here's why: rising demand (a rightward shift of the demand curve) causes the equilibrium price to rise, not fall. The higher price then incentivises producers to supply more - but this is an expansion of supply (a movement along the supply curve), not an increase in supply (a shift of the curve). The distinction matters enormously for your diagrams and written analysis.

Demand goes up → price rises → quantity supplied expands (movement along supply curve) → NOT a new supply curve.

Getting this right in Paper 1 or Paper 2 will genuinely separate you from students who just remember phrases without understanding the mechanism. Examiners are looking for exactly this level of precision.

What Determines a Firm's Willingness to Supply?

At its core, a firm's willingness to supply boils down to one thing: the possibility of maximising profits. Firms analyse current market conditions - input costs, technology, competition, prices - and ask themselves: can we make money here? Can we make more money by producing more, or less?

That's what the supply curve represents. It's essentially a map of every price point and how much firms are prepared to produce at each one, given their costs and expectations. When conditions change - through CISTERN factors - the entire map shifts.

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IB Economics Summary & The CISTERN Reminder

Before you close this tab, learn CISTERN. These are the seven non-price factors that shift supply:

IB Economics CISTERN

C - Costs of factors of production → rise in costs = left shift
I - Indirect taxes → tax increase = left shift
S - Subsidies → subsidy = right shift
T - Technological change → better tech = right shift
E - Expectations of future prices → depends on expectation direction
R - Related goods (joint or competitive supply)
N - Number of firms → more firms = right shift

And remember: everything in CISTERN causes a shift of the supply curve. Only a change in price causes a movement along it.

Next time you hear about chip shortages, energy price caps, or EU farm subsidies, you'll know exactly which letter of CISTERN to reach for. That's how economics works in the real world - interconnected, and surprisingly fascinating once you know what you're looking for.

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• Real IB Economics exam application showing how to use diagrams effectively in Paper 1 and Paper 2

Frequently Asked Questions

Q1. What is the law of supply in IB Economics?

The law of supply states that as the price of a good rises, the quantity supplied also rises, and vice versa - assuming all other factors remain constant (ceteris paribus). This is because higher prices increase profit potential, incentivising firms to produce more.

Q2. What does CISTERN stand for in IB Economics?

CISTERN is the acronym for the seven non-price determinants of supply: Costs of factors of production, Indirect taxes, Subsidies, Technological change, Expectations of future prices, Related goods (joint or competitive supply), and Number of firms in the industry. Each factor can shift the supply curve left or right.

Q3. What is the difference between a shift of the supply curve and a movement along it?

A movement along the supply curve is caused only by a change in the price of the good itself - this is called a change in quantity supplied (an expansion or contraction). A shift of the supply curve is caused by a change in any non-price determinant (CISTERN) - this is called a change in supply. The whole curve moves left (supply decreases) or right (supply increases).

Q4. What is the difference between joint supply and competitive supply?

Joint supply occurs when producing one good automatically produces another - for example, beef and leather. If beef production increases, leather supply also rises. Competitive supply occurs when limited resources mean producing more of one good reduces the output of another - for example, a factory choosing between smartphones and smartwatches on the same production line.

Q5. Why does the law of diminishing marginal returns only apply in the short run?

Diminishing marginal returns occur because at least one factor of production is fixed in the short run - for example, factory size or machinery. Adding more variable inputs (like labour) to a fixed factor eventually yields smaller and smaller increases in output. In the long run, all factors of production become variable, so the constraint disappears and firms can expand their full productive capacity.

Stay well,

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