- Movement Along the Supply Curve / Change in Quantity Supplied / Expansion and Contraction of Supply
When the quantity supplied of a commodity changes as a result of change in its own price, remaining other factors constant, it is known as a change in quantity Supplied.
The amount of commodity supplied changes with rise and fall of the price while other determinants of supply remain constant. This change, when shown in the graph, is known as movement along a supply.
Thus, it is a movement between points along a stationary supply curve, ceteris paribus.
The change in quantity supply may be two types:
1. Expansion in Supply
2. Contraction in Supply
1. Expansion in Supply:
When the quantity supplied of a commodity rises due to a rise in its own price, it is called “expansion of supply”.
It means when the quantity supply of a commodity rises with a rise in its price only, other factors affecting supply remaining the same, then it is the ” expansion of supply” or “expansion in supply” or “increase in quantity supplied”.
It is denoted by the upward movement along a supply curve.
The reason for expansion is the rise in its own price.
2. Contraction of Supply :
When quantity supplied of a commodity falls due to a fall in its own price, other factors remaining same it is called contraction of Supply .
It represents a decrease in the quantity supplied of a commodity in the market.
It is denoted by a downward movement along the supply curve.
It is caused by a fall in price of the commodity.
Graphical illustration of Expansion and Contraction :
In the above figure, SS is an upward sloping supply curve representing various combinations of price and supply.
Suppose the initial price is P1 with corresponding supply of Q1. The point A1 represents such a combination.
When there is an increase in price from P1 to P2, the new combination has formed by point A2.
Thus the movement from point A1 to A2 is expansion or extension of supply or rise in quantity supplied .
Similarly when there is a fall in price from P1 to P3 the corresponding supply also decreases as represented by combination A3. The movement from A1 to A3 is the contraction of supply or fall in quantity supplied.
Therefore the change in price – supply combination from A1 to A2 and A3 is the movement along the supply curve or change in quantity supplied.
It is due to the change in the own price of the commodity.
Shift of Supply Curve/ Change in Supply:
The amount supplied of a commodity may not change only because of the price of the commodity but also due to the change in other factor affecting supply like change in input prices, change in prices of related commodities, change in technology, tax rate, natural factor etc.
“When the amount supplied of a commodity increases or decreases because of change in factors other than the own price of the commodity it is called change in supply.”
When the quantity of the commodity supplied changes due to change in non – price factors, the supply curve does not extend or contract but shifts entirely. The shift indicates that there is a larger or smaller amount of supply at a similar price and that is determined by the nature of effect of other factors affecting supply.
A change in supply is involved when the entire supply curve shifts. An increase or decrease in supply due to change in determinantes except the price is represented by shift in the supply curve. It may be of two types:
1. Increase in Supply or Rightward / Outward Shift.
2. The decrease in Supply or Leftward / Inward Shift.
1. Increases in Supply:
An increase in supply refers to a situation when the producers are willing to supply a larger quantity of the commodity at the same price or same quantity at a lower price.
An increase in supply may take place due to a decrease in the cost of production, improvement in techniques of production, a fall in the price of related goods, lowering taxes, decrease in input prices, increasing the subsidies by the government, etc.
An increase in supply means the entire supply curve shifts to the right, indicating a large amount offered at every price.
Thus increase in supply is also referred to as a rightward shift of the supply curve.
2. Decrease in Supply:
A decrease in supply, refers to a situation where the producers are willing to supply a smaller quantity of the commodity at the same price or same quality at a higher price.
The decrease in supply takes place due to an unfavourable change in factors affecting supply other than the price of the commodity.
It is due to an increase in taxation by the government, increase in input prices, an increase in the price of related goods, change in motivation of the producers etc.
A decrease in supply means that the entire supply curve shifts to the left, indicating a smaller quantity offered for sale at any particular price.
Graphical Illustration of Shift of Supply Curve :
In the above figure, let us suppose that S1S1 is the original supply curve where Q1 amount of commodity has been supplied at price P1.
A change in one or more determinants of supply except for price, such as cost of factors, price of the related goods, government policy etc will cause a change in supply. An increase in supply shifts the entire supply curve to the right, from S1 to S2.
The rightward shift in the supply curve represent that suppliers are ready to sell large quantities at constant price due to change in other determinants of supply ( decrease in cost of production) .
Since the production of the commodity has increased, its supply has been increased by (Q2 – Q1) amount at the same price.
This has caused the supply curve rightwards and and new supply curve S2S2 has formed.
Similarly, due to unfavourable changes in non – price factors of the commodity, the production and supply have fallen to Q3 amount.
A decrease in supply shifts the supply curve to the left from S1 to S3. The leftward shift in the supply curve indicates that sellers are willing to sell less quantity at a constant price due to change in other determinants of supply ( increase in cost of production). This way the supply curve shifts leftward and new supply curve S3S3 has formed.
Thus, an increase in supply means that the entire supply curve shifts to the left, signifying a fewer amount of supply at every price.
Causes of Shift/ Change in Supply / Shifting Factors:
1. Increase in Supply :
- Improvement in technique of Production:
An improvement in technique decreases the cost of production and hence increases the profit margin for the seller, so he will induce to supply more.
- Fall in input prices:
A fall in input prices, decreases cost of production and increase profit margin and hence supply is increased.
- Expected fall in the price in future:
When the producer expects a fall in price of the commodity in future, he tends to increase supply at present to get more profit.
- Lowering of the taxes :
Lowering of taxes on production and raising production subsidies by government is another factor which increases the supply. This reduces cost of production and increases profit margin. Thus supply is increased.
- Number of sellers:
The greater the number of sellers, the larger will be the supply.
2. Decrease in Supply:
- Use of less efficient technique of production:
The use of relatively less efficient technique of production causes the cost of production to increase. Therefore the profit margin is reduced which induces the sellers to decrease supply.
- Rise in Input Price :
The rise in input price, increase cost of production and reduces profit margin. This will induce the producer to lower the supply.
- Expected rise in the price in future:
If producer expects a rise in price of commodity in future, he will tend to supply less today and hoard it to offer a large quantity in future at higher price.
- Raising Taxes and lowering Subsidies :
Government’s policy of raising taxes and lowering subsidies increase the cost of production and decreases profit margin. Increased margin of profit induces the producer to supply less.
- Number of Sellers:
The decreased number of sellers will tend to supply less.
Expansion of Supply Vs. Increase in Supply:
The difference between expansion of supply and increase in supply can be shown diagrammatically.
Expansion of supply refers to a condition when larger quantity is supplied at higher price.
Expansion of the supply curve
In the given figure, as the price of the commoditymrises from OP0 to OP1 the quantity supplied of this commodity rises from OQ0 to OQ1 .
Thus there will be an upward movement from A to B along the supply curve SS.
While an increase in supply refers to a situation when the producer is willing to supply a larger quantity at the same price because of change in factors other than the own price of commodity.
Increase in Supply
In the above figure, SS is an original supply curve, where at OP price OQ0 quantity is supplied.
But as result of change in factors other than the own price of the commodity, OQ1 quantity of the commodity is supplied at the same price OP.
Thus, there is a movement from point A on supply curve SS to point B on supply curve S1S1. This rightward shift of supply curve from SS to S1S1 shows increase in supply.
Difference between Expansion of Supply and Increase in Supply :
|
S N |
Expansion of Supply |
Increase in Supply |
|
1. |
It refers to the larger quantity being supplied by |
It refers to larger amount being supplied at the |
|
2. |
The expansion in supply is due to rise in its own |
An increase in supply is due to change of other |
|
3. |
It is related to upward movement along the same |
It leads to a rightward shift of the supply curve. |
Contraction of Supply Vs. Decrease in Supply:
The difference between contraction of the supply and decrease in supply can be shown diagrammatically.
Contraction of supply refers to the condition when a smaller quantity of commodity is supplied at a lower price.
Contraction of Supply
In the given figure, as the price of the commodity falls from OP0 to OP1, the quantity supplied of this commodity falls from OQ0 to OQ1. Therefore there will be a downward movement from A to B along the supply curve SS.
A decrease in supply, on the other hand, is a situation when the producer is willing to supply a smaller quantity of a commodity at the same price because of change in factors other than the own price of the commodity. Thus, there is a leftward shift.
Decrease in Supply
In the given figure, at price OP, OQ0 quantity of the commodity is supplied initially. But as a result of change in factors other than price, OQ1 quantity of the commodity is supplied at the same price OP. There is a movement from point A on supply curve SS to point B on supply curve S1S1. This leftward shift of supply curve from SS to S1S1 show decrease in supply.
Difference between Contraction of Supply and Decrease in Supply :
|
SN |
Contraction of Supply |
Decrease in Supply |
|
1. |
It means a fall in the amount supplied due to a |
It means a smaller amount of supply at the same |
|
2. |
It is due to a decrease in the own price of the |
It is due to the unfavorable or negative effects of |
|
3. |
It is shown by downward movement along the same supply |
It is showed by a leftward shift in the supply |
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