Change in quantity supplied
A change in quantity supplied is a change that occurs as a result of a change in the price of the commodity and it necessitates (involves) a movement along the same supply curve, either upward or downward. A fall in the price of a product often compels producers to reduce output especially if the price falls below cost of production. And this causes a fall in supply form Q1 to Q2 in figure 10.
On the other hand, an increase in the price encourages producers to expand production as they realize more profit. And this causes a rise in supply from Ql to Q3.
Both changes are illustrated by the two arrows: one pointing downward (a decrease in supply) and the other pointing upward (an increase in supply). It, therefore, necessitates (causes) a movement along the same supply curve as illustrated in figure 10.
Change in supply
A change in supply is a change that occurs as a result of a change in certain factors like number of producers, cost of production, technical progress, income, demand, etc. And it causes a shift of the supply curve either inward or outward as illustrated in figure 11.
As the number of producers (farmers) increases, the output also increases. This leads to increase in supply even though the price remains constant. This makes the supply curve to shift outward from SSI to SS3. Whereas a decrease in number of producers reduces quantity supply. And this makes the supply curve to shift inward from SS1 to SS2 as clearly indicated in figure 11.
Note: A shift of supply curve either inward (to left) or outward (to right) implies a decrease or an increase in supply respectively. We outline below the causes of the shift of the supply curve either inward or outward.
Causes of inward and outward shift of supply curve.
Causes of inward shift
- Poor (declining) technology.
- Increase in cost of production.
- A fall in number of producers.
- A fall in the price of the commodity.
- A great fall in demand for the product (slump).
- Unfavourable government policies.
- Poor climatic condition.
- A fall in prices of substitutes. etc.
Reasons for outward shift
- Improved technology.
- A fall in cost of production.
- Increase in number of producers.
- An increase in the price of the commodity.
- A great rise in demand for the product (boom).
- Favourable government policies.
- Good weather.
- A rise in prices of substitutes. etc.
Increase in supply
It is a situation in which a producer or a seller offers more of his goods for sale at a particular price in a given period. And all things being equal, it causes a shift of supply curve to the right and downward.
An increase in supply lowers prices except it is accompanied with a corresponding rise in demand. While increase in demand raises prices except it is also accompanied with a similar increase in supply.
Effects of increase in supply of margarine on price of butter.
Firstly, increase in supply of margarine causes a rise in quantity supplied from Qo to Q1 in figure 12. Secondly, it causes a fall in price of margarine from Po to P1.
Margarine and butter are close substitute. That is, they can conveniently replace each other in the absence of one or increase in price of one.
- An increase in supply of margarine, all things being equal, causes a fall in demand for butter.
- It causes a fall in the price of butter from Po to P1.
- It causes a fall in quantity demanded of butter from Qo to Q1.
The extent to which demand of butter will fall depends on elasticity of supply and demand. Goods with very close substitutes, like margarine and butter, fish and beef, biro and pen, etc tend to have elastic demand. Thus the change in price of butter will be more than a proportionate change in quantity demand. That is, a small change in price of butter will lend to a big change in its quantity demanded.
Effects of increase in supply of margarine on price of bread
Margarine and bread are complement. The use of one necessitates the use of another. Increase in supply of margarine causes a rise in quantity offered for sale and a fall in its price.
- It leads to increase in demand for bread.
- It causes a rise in the price of bread from Po to Pl as shown in figure 15.
- The extent to which demand for bread will rise depends on the elasticity of supply and demand.
Bread, unlike margarine, does not have close (perfect or superior) substitutes. Therefore, its demand tends to be inelastic. And the change in the price of bread will be less than a proportionate change in quantity demanded. That is, a big change in its price will cause a small change in the quantity demanded.