Change in supply/ Shifts in supply curve.
Learning
Contents:
·
Increase in
supply
·
Decrease in
supply
Introduction
As studied in previous
post related to the determinants of supply that states, it is not only the
price which cause change the supply for the commodity but in the real world
there also exist other factors such as price of related goods, objective of the
firm, government policies, technology changes, etc. that affect the supply for the
commodity.
Change in supply
indicates that supply for the commodity changes due to change in other factors
keeping the price of the commodity constant. In other words, when supply for the
commodity increases or decreases due to change in other factors or determinants
of supply, other than the own price of the commodity is called as ‘shifts in supply curve’.
Shifts in supply curve
are also known as change in supply. Such shifts in supply curve may be either increase in supply (rightward/ forward
shift) or decrease in supply (leftward/backward
shift). Hence, the shifts in supply are classified into two types:
1.
Increase in supply:
When supply for a
commodity increases due to change in other factors keeping the price as
constant is called an increase in supply. It is a situation where a seller is
willing to sell more commodities at the same price. Increase in supply is
indicated by the rightward or forward shift in supply curve.
Causes of Increase in supply
(Factors leading to rightward or forward
shift in supply curve)
1. Objective
of firm changes from profit maximization to sales maximization. Firms will be
willing to sell more even if the price remains constant. Therefore, supply will
increase.
2. When
government introduces more subsidies and imposes less tax on the firms. It will
lead to increase in the supply for the commodity.
3. When
some new and improved technology is introduced in the market. It will lead to
lower cost of production. Therefore, supply will increase.
4. When
more firms join the industry, leading to the large production of goods and
services. Hence, supply increases.
5. When
firms expect that price of the commodity will fall in future. It will prompt
the seller to sell more in current period at the prevailing price
6. When productivity of worker is improved. It will lead to increase in the supply for the commodity.
Table 1.1-Increase in supply
|
Price (₹) |
Quantity supplied (Units) |
|
20 |
20 |
|
20 |
40 |
Explanation:
From the above table
1.1, we see that when price of the commodity is ₹ 20, seller initially sells 20
units of the commodity. Further, seller is willing to increases its sales and
he sells 40 units of the commodity at the same price i.e. ₹ 20. It might be due
to decrease in the price of related goods, increase in subsidies and
decrease in taxes by the government or reduction in the cost of the production or
other such factors. Looking at the figure 1.1 that shows increase in supply; S1
is the initial supply curve shows the quantity supplied is 20 units when
the price of a commodity is ₹ 20. Further, the supply curve shifts rightward
from S1 to S2 shows 40 units of the commodity are now sold
at the same price. Therefore, increase in supply is indicated by rightward or
forward shift in supply curve From S1 to S2.
2.
Decrease in Supply:
When supply for the
commodity decreases due to the change in other factors keeping the price as
constant is called as decrease in supply. It is a situation where the seller is
willing to sell fewer commodities at the same price. Decrease in supply is
indicated by leftward or backward shift in supply curve.
Causes of
Decrease in supply
(Factors
leading to leftward or backward shift in supply curve)
1. Objective
of firm changes from sales maximization to profit maximization. Firms will be
willing to sell less even if the price remains constant. Therefore, supply will
decrease.
2. When
government introduces fewer subsidies and imposes more taxes on the firms. It
will lead to decrease in the supply for the commodity.
3. When
firm is depending on the usage of outdated technology for the production of
goods and services. It will lead to less efficiency and higher cost of
production. Therefore, supply will decrease.
4. When
more firms leave the industry, leading to less number of firms in the market
and further reducing the production of goods and services. Therefore, supply
will decrease.
5. When
firms expect that price of the commodity will rise in future. It will prompt
the sellers to sell less at prevailing price in current period of time.
6. When productivity of the workers fall. It will lead to decrease in the supply for the commodity.
Table 1.2-Decrease in supply
|
Price (₹)
|
Quantity supply (Units) |
|
20 |
40 |
|
20 |
20 |
Explanation:
From the above table 1.2,
we see that when price of the commodity is ₹ 20, seller initially sells 40
units of the commodity. Further, seller is not willing to sell more of the
commodity and sells 20 units of it at the same price i.e. ₹ 20. It might be due
to increase in the price of related goods, decrease in subsidies and
increase in taxes by the government or increase in the cost of the production or
other such factors. Looking at the figure 1.2 that shows decrease in supply; S1
is the initial supply curve shows the quantity supplied is 40 units when
the price of a commodity is ₹ 20. Further, the supply curve shifts backward
from S1 to S2 shows 20 units of a commodity are now sold
at the same price. Therefore, decrease in supply is indicated by leftward or backward
shift in supply curve From S1 to S2.
Test Yourself:
Multiple
choice questions based on the above topic
(Choose the
correct answer)
1.
Shift in supply curve means:
a. fall
in supply due to fall in own price of the commodity.
b.
rise in supply due to rise in own price of the commodity.
c.
change
in supply due to factors other than own price of the commodity.
d.
none
of these.
2.
Increase in supply is, graphically, represented by:
a. A leftward shift in the supply
curve.
b.
A rightward shift in the supply curve.
c.
A movement up and to the right along a supply curve.
d.
A
movement down and to the left along a supply curve.
3. Which of the following will decrease the supply for the commodity?
a. Improvement in the
technology.
b. Occurrence of Natural
disasters.
c. Introduction of new
subsidies by government.
d. None of above.
4. When we say supply increases, we mean that there is a
a.
movement to the right along a supply curve.
b.
movement to the left along a supply curve.
c.
leftward shift of the supply curve.
d. rightward shift of the supply curve.
5.
Which of the following are the reasons of forward shift in supply curve?
a. Low cost of production
b. Improvement in
technology
c.
Shift of firm’s goal from profit maximization to sales maximization.
d.
All of these.
6.
When a new tax is imposed by the government, will
shift the supply curve
a. to the right.
b.
to the left.
c.
to the right as well as to the left.
d.
none
of these.
7.
The supply curve shifts backward because of
a. Increase in the cost of production
b.
Decrease of firms in the market
c.
Expectations about future price to increase.
d.
All
the above
8.
When supply falls due to factors other than own price
of the commodity, it indicates
a. Contraction of supply
b.
Decrease in supply
c.
Increase in supply
d. None of these
Answer Key
|
1.c |
2.b |
3.b |
4.d |
|
5.d |
6. b |
7. d |
8. b |
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