We have discussed the effects on market equilibrium price due to changes in demand. Now we could also explain the effects on market equilibrium price due to changes (shifts) in supply.
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 also be illustrated by following diagram:
In the diagram (8.8) the demand curve DD/is assumed as fixed and change takes place only in the supply curve SS/. It shifts to the right side of the original curve, when supply rise. The S2S2 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 quantity. When supply increases, OK becomes the new equilibrium quantity and NK the new equilibrium price. When supply falls, OD is the new equilibrium quantity and FD is 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.
Effects on Market Equilibrium Price due to 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.