Question

Look at the following graph and answer the following questions: (a) What is the meaning of shift in the supply curve from S0 to S1? (b) What is the meaning of shift in the supply curve from S1 to S0? (c) When there is a shift in the supply curve from S0 to S1, what will happen to the quantity supplied?

part a to e is worth 2 marks each. Total 6 marks.

6 points

Answer 1

I am assuming that the supply curve S1 is to the right of supply curve S0

(a) When the supply curve shifts to the right from S0 to S1, it means that the aggregate supply has increased. For each level of price, the quantity supplied has gone up. This can happen due to several factors such as a decrease in input prices, improved technology etc.

(b) When the supply curve shifts to the left from S1 to S0, it means that the aggregate supply has decreased. For each level of price, the quantity supplied has gone down. This can happen due to several factors such as an increase in input prices, negative technology shock etc.

(c) As the supply curve shifts from S0 to S1, at the new point of equilibrium, the quantitiy supplied will be higher and the prices will be lower than earlier.