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Determination of Prices

Changes in Supply

Here, changes mean increase or decrease in the volume of demand and supply from its equilibrium. Equilibrium means the point where the supply and demand curve intersect each other. Due to the effects of the determinants, demand or supply of a product may change and demand and supply curve may shift. Such shift affects equilibrium price and quantity. Now we are going to discuss changes in supply.

Changes in Supply

Change in supply includes an increase or decrease in supply. It may be due to the change in the price of related goods, income, taste, and preference of consumers, etc. So there are two possible changes in supply:

  • Increase (shift to the right) in supply;
  • Decrease (shift to the left) in supply;

I) Increase in Supply (Shift to the Right)

Suppose there is a new technology available in the market. Supplier adopts such new technology. Due to adopting new technology supply increases and other facts remain the same. When supply increases, it results in an excess supply at the earlier equilibrium price.

So there will be competition among sellers, which reduces the price. Price fall leads to a rise in demand and fall in supply. These changes will continue until the new equilibrium is established. Hence, Equilibrium price falls and the equilibrium quantity rises. Keep in mind the following points:

  • Supply Increases
  • Demand is constant
  • Equilibrium price go down

Changes in Supply

Source: dreamstime.com

Browse more Topics under Determination Of Prices

  • Intro to Determination of Prices
  • Changes in Demand
  • Simultaneous changes in Demand and Supply
  • Features of Perfect Competition
  • Price Determination under Perfect Competition
  • Long Run Equilibrium of Competitive Firm and Industry
  • Monopoly Market
  • Monopolist’s Revenue Curve
  • Price Discrimination
  • Monopolistic Competition
  • Oligopoly
  • Kinked Demand Curve

II) Decrease in Supply (Shift to the Left)

Now let us think of the opposite of the above situation. Suppose supplier does not adopt such new technology available in the market. Old technology which supplier uses is being obsolete. This will affect the efficiency of production level. So supply will decrease.

When supply decreases, it creates an excess demand at the old equilibrium price. This results in a competition among buyers, which raises the price of product or services.

Increase in price results in a rise in supply and fall in demand. These changes will continue until the new equilibrium is established. Hence, Equilibrium price increases and equilibrium quantity falls.

Now we can conclude, due to a decrease in supply, there is an increase in equilibrium price. Resultantly quantity demanded also decreases because the price has increased. Thus, the Supply curve will shift leftward. Keep in mind the following points:

  • Supply decreases
  • Demand is constant
  • Equilibrium price go up

Solved Example on Changes in Supply

Q: With a given demand curve, an increase in supply causes?

  1. An overall decrease in price, but an increase in equilibrium in quantity.
  2. No change in overall price but a reduction in equilibrium quantity.
  3. An overall increase in price, but a decrease in equilibrium in quantity.
  4. An overall decrease in price, but a decrease in equilibrium in quantity.

Ans: If there is an increase in supply with a given demand curve, there will be excess supply in the market. Due to excess supply, the price of the product goes down. Due to the price fall, the consumer will purchase more quantity in comparison to earlier. Therefore overall equilibrium will go up. Hence option “a” is correct.

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