Change in Equilibrium Price Due to Shift in Supply
Check how changes in supply impact market equilibrium. Learn the effects of supply increases and decreases on market dynamics, with a focus on the change in equilibrium price due to shift in supply.
Muskan Verma29 Jan, 2025
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Understanding the change in equilibrium price due to shift in supply is essential for grasping the complexities of economics. One key concept to understand is how shifts in the supply curve influence equilibrium prices. To learn this, we need to dive into the dynamics of supply, demand, and equilibrium in a market.
What is Supply and Supply Curve?
Supply refers to the total quantity of a good or service that producers are willing to sell at various prices during a specific period, holding other factors constant. The supply curve, a graphical representation of this concept, shows the relationship between the price of a good and the quantity supplied. According to the Law of Supply, there is a direct relationship between the price of a product and the quantity supplied – as the price increases, the quantity supplied also increases, and vice versa.Supply Function and Its Factors
The supply function (or schedule) mathematically expresses the relationship between the quantity of goods supplied and various factors that influence supply. The general form of the supply function is:Qs = f (Px, Y, COP, C, T, Ip,... )
Where:- Px is the price of the good.
- Y is consumer income (affecting the overall demand, which indirectly impacts supply).
- COP represents the cost of production.
- C is the number of sellers in the market, reflecting the level of competition.
- T is taxes or subsidies impacting the cost of goods.
- Ip represents inputs like labor and raw materials needed for production.
Market Equilibrium
Market equilibrium occurs when the quantity of a good demanded equals the quantity supplied at a particular price. At this point, the market clears, meaning there are no shortages or surpluses of goods. The equilibrium price is the price at which the demand curve intersects the supply curve, and the equilibrium quantity is the quantity at which both curves meet. The equilibrium can be visualized where the supply and demand curves cross. However, external factors, such as changes in the cost of production, taxes, or technological advancements, can cause shifts in the supply curve, leading to a new equilibrium. This is when we observe a change in equilibrium price due to shift in supply.How the Change in Equilibrium Price Due to Shift in Supply Affects the Market
When there is a shift in the supply curve, the equilibrium price and quantity adjust accordingly. There are two possible scenarios:Increase in Supply (Rightward Shift of the Supply Curve)
This shift typically occurs when the production of a good becomes more efficient or less costly. For example, better technology, favorable weather conditions, or reductions in production costs can lead to an increase in supply. A rightward shift in the supply curve means that producers are willing to sell more goods at every price level. As a result, the new equilibrium price tends to decrease, and the equilibrium quantity increases. Example : Consider the case of wheat production in India. If the country experiences a good monsoon season, the supply of wheat increases. The supply curve shifts to the right, leading to a new equilibrium with a lower price and a higher quantity of wheat available in the market. This is an example of change in equilibrium price due to shift in supply.Decrease in Supply (Leftward Shift of the Supply Curve)
Conversely, a reduction in supply, such as higher production costs or restrictions on resources, shifts the supply curve leftward. In this case, fewer goods are available at every price point, leading to an increase in the equilibrium price and a decrease in the equilibrium quantity. Example : If a government imposes higher taxes on a product or if there is a disruption in production (such as a strike or scarcity of raw materials), the supply curve shifts to the left. The resulting effect is higher prices and lower quantities of goods available in the market. This is another instance of change in equilibrium price due to shift in supply.Impact of Change in Equilibrium Price Due to Shift in Supply
Let's analyze the case of wheat production again. If there is an increase in supply due to favorable weather conditions, the supply curve shifts to the right (from S to S1), as shown in the graph. The new equilibrium occurs where the demand curve (D) intersects the new supply curve (S1). At this new equilibrium:- The equilibrium price decreases from P to P1.
- The equilibrium quantity increases from Q to Q1.
Change in Equilibrium Price Due to Shift in Supply FAQs
What is market equilibrium?
Market equilibrium occurs when the quantity demanded by consumers equals the quantity supplied by producers at a particular price. At this point, the market-clearing price (equilibrium price) and the equilibrium quantity are established.
What happens when supply increases?
When supply increases, the supply curve shifts to the right. This results in a lower equilibrium price and a higher equilibrium quantity, as the increased supply makes the good more affordable, increasing consumer demand
What causes a shift in the supply curve?
A shift in the supply curve can be caused by several factors such as changes in production technology, a reduction in the cost of production, an increase in the number of suppliers, or external factors like favorable weather conditions for agriculture.
How does a decrease in supply affect the market?
When supply decreases, the supply curve shifts to the left. This leads to a higher equilibrium price and a lower equilibrium quantity, as the reduced supply creates scarcity, which drives prices up.
Can technological advancements affect supply?
Yes, technological advancements can increase supply by making production more efficient. This often leads to a rightward shift in the supply curve, lowering prices and increasing the quantity of goods available in the market.
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