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Home Equilibrium of Demand and Supply Effects of Shifts in Supply on Market Equilibrium

Effects of Shifts in Supply on Market Equilibrium:

 

Just as we have discussed the effects of changes in demand on price, we can also explain the effects of changes in supply on the equilibrium price.

 

We assume here that the demand curve remains fixed and a change takes place in the supply of a commodity.

 

The change in the supply of a commodity will result in shifting. Supply curve upward or downward from the original supply curve. When supply rises, demand remaining the same, the supply curve shifts downward from the original curve, i.e., it lies on the right side of the original curve. In case of fall in supply, demand remaining the same, the supply curve moves upward, i.e., it shifts to the left side of the original curve. This  can be also illustrated graphically.

 

Diagram/Figure:

 

 

In the diagram (8.8) the demand curve DD/ is assumed as fixed and change takes place only in the supply curve. SS/ shifts, to the right side of the original curve, when supply rise. The S1S2 supply curve was to the left side of the original supply curve when supply falls. PM is the initial position of the equilibrium price and OM the initial equilibrium amount. When supply increases, OK becomes the new equilibrium amount and NK the new equilibrium price. When supply falls, OD is the new equilibrium amount and FD the new equilibrium price.

 

Here again a question can be asked that if supply rises, will it effect the quantity in greater proportion or the price. The answer is that it depends upon elasticity of demand. If demand is perfectly elastic, see in fig. (8.9) the price will not be affected and quantity demanded will, however, increase with the increase in supply. The price remains unaltered OD.

 

 

Inelastic Demand:

 

If the demand is perfectly inelastic, then with a fall in supply, the quantity demanded will remain unaffected and the price will go up.

 

With inelastic demand curve, when supply decreases there is no change in the quantity. It remains OM (figure 8.10). The price, on the other hand, rises from ML to MK and then with further fall in supply, it increases to MZ. ln practice, the elasticity of demand is neither perfectly elastic nor perfectly inelastic. It is either equal to unity, greater than unity or less than unity.

 

 

If the elasticity of demand is equal to unity, the quantity and price will be affected in equal proportion with a rise or fall in supply.

 

If elasticity is greater than unity, there will be greater change in quantity and less change in price.

 

If elasticity of demand is less than unity, then the price is affected more than the quantity demanded.

Relevant Articles:

Equilibrium of Demand and Supply
Effects of Changes in Demand on Equilibrium Market

Effects of Shifts in Supply on Market Equilibrium

Effects of Shifts in Both Supply and Demand on Equilibrium Price and Quantity
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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