The
1st effect of changes in
supply (shift of supply to right) may be stated as follows.
In
the short run, other things being equal, an increase in supply cause surplus and it will fall the price which in turn extent the demand and contract
the supply until it reach a new equilibrium
Diagram
to show the effect of increase in supply
The
initial equilibrium is at EP
price and EQ quantity
demanded and supplied.
Due
to a change in the …….other than price factor…… supply
now increases
The
increase in supply is shown by a shift of supply curve to S1S1 from SS.
This
will results a surplus (at this time, demand is less than supply) at the
ruling price EP.
This
surplus will push the price downwards.
Now
the decreased price cause an extension of demand and contraction of supply (as
shown by a movement along the curve) until it reach a new equilibrium at price NEP (less than EP) and quantity
demanded and supplied NEQ
(greater than the EQ)
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