Question

Examine the effects of the following on the supply curve of a Good X, using suitable diagram:
a) fall in own price of Good X.
b) rise in price of factor input producing Good X.

Answer 1

i) Fall in own price reduces (contracts) supply and the producers moves along the same curve S from.A to B when price falls from Op1 ro Op2 and supply falls from OQ1 ro OQ2.

(ii) Rise in tax rate increase the cost of the goods. So its supply decreases. This shifts the supply curve S to S1. Price remains unchanged at OP while quantity supplied decreases/falls from OQ1 to OQ2.

Detailed Answer:

(i) When there is a fall in the own price of good X, it will lead to contraction in supply. Contraction in supply occurs when other things being equal, quantity supplied of a commodity decreases due to fall in its own price. Following diagram illustrates this:

(ii) Increase in taxes raises the cost of production and thus, reduces the supply, due to lower profit margin. The supply curve shifts towards the left from SS to S1S1 as shown in the