Question

1. Distinguish between changes in “supply” and changes in “quantity supplied”. Which refers to a shift in a supply curve and which refers to a movement along a supply curve? Discuss the factors that can cause a change in supply and demonstrate graphically an increase/ decrease in supply. What is the effect of an increase/ decrease in supply on equilibrium price and equilibrium quantity? Demonstrate graphically and explain.

Answer 1

Changes in "supply" and changes in "quantity supplied".

Change in supply is the shift in the supply curve. Shift in supply curve occurs when the price remains the same.

Change in quantity supplied is the movement along the supply curve due to changes in price.

Factors that cause a change or shift in supply.

• Changes in costs of production. Lower costs of product will shift supply curve to the right. Higher cost of production will shift the supply curve to the right.
• Technological advances. Supply curve will shift to the right as more goods can be supplied.
• Prices of related goods. If prices of large cars increase, then supply of small cars will increase.
• Supply Determinants. Aside from prices, other determinants of supply are resource prices, technology, taxes and subsidies, prices of other goods, price expectations, and the number of sellers in the market. Supply determinants other than price can cause shifts in the supply curve.

An increase in supply, and demand remains the same, will shift the supply curve to the right. The equilibrium price will fall and quantity will increase.

A decrease in supply, and demand remains the same, will shift the supply curve to the left. The equilibrium price will rise and quantity will fall.