After you have worked through this section of the learning unit, you should be able to:
- illustrate and explain the adjustment process in a market if the market supply increases
To analyse the impact of a change in supply, we will use our demand and supply curves for fried chicken pieces.
Let us see what happens in this market if the number of suppliers increases.
The number of suppliers is a factor that impacts on the supply. An increase in the number of suppliers increases the supply of goods and services. This is represented by a rightward shift of the supply curve.
In the diagram below, the supply curve shifts from S to S1, and a new equilibrium position is reached at point E1.
An increase in supply
An increase in supply
An increase in supply
An increase in supply creates and excess demand
An increase in supply creates and excess demand
By comparing the new equilibrium position, E1, with the initial equilibrium position, E, you can see that the equilibrium price decreases from R4 to R2, and the equilibrium quantity increases from 3 000 to 4 200. At this new equilibrium position, both the quantity demanded and the quantity supplied increase from 3 000 to 4 200.
Adjustment process for an increase in supply
At the initial equilibrium position with a price of R4, the increase in supply creates excess supply. At this price of R4, the quantity supplied is now 5 400, while the quantity demanded is 3 000. Hence there is excess supply of 2 400.
The market is now in disequilibrium since the suppliers cannot sell their planned quantity at R4. This disequilibrium will lead to changes in the market that will result in a new equilibrium.
Let us see how this excess supply leads to a new equilibrium.
From excess supply to new equilibrium
At a price of R4, excess supply of 2 400 exists.
As you know, excess supply will force suppliers to offer buyers a lower price so that they can get rid of the good. As long as there is excess supply, the price of the good will decline. This will cause an increase in the quantity demanded and a decrease in the quantity supplied. The surplus thus declines.
Assume that the price decreases to R3,00. At this price of R3,00, the quantity demanded is 3 600 and the quantity supplied 4 800. There is thus a decline in the excess supply from 2 400 to 1 200.
An excess supply decreases the price
This trend of a decline in price and excess supply will continue until a position is reached where the quantity demanded is equal to the quantity supplied. This happens at the new equilibrium position where the equilibrium price is R2 and the equilibrium quantity is 4 200.
An excess supply decreases the price
Note that the demand curve does not shift – a movement along the demand curve occurs.
> The result of an increase in supply is that the equilibrium price decreases and the equilibrium quantity increases.
Watch the following video:
Activity
Do the following activity to see if you understand what happens in a market when the supply increases:
Use the following diagram to indicate what happens to the equilibrium position if the supply increases because of a decrease in the cost of production:
There is (a rightward shift; a leftward shift; no shift) of the demand curve.
Think again. We are dealing here with a supply factor.
Think again. We are dealing here with a supply factor.
Correct. We are dealing here with a supply factor and it is the supply curve that will shift. Not the demand curve.
There is (a rightward shift; a leftward shift; no shift) of the supply curve.
Correct. A decrease in the cost of production indicates the quantity supplied increases at each price and the supply curve shifts to the right.
Think again. A decrease in the cost of production increases the supply.
Think again. A decrease in the cost of production increases the supply.
The equilibrium price (increases; decreases; stays the same).
Think again. The supply increases and the supply curve shifts to the right.
Correct. The supply increases and the supply curve shifts to the right and the equilibrium price decreases.
Think again. The supply increases and the supply curve shifts to the right.
The equilibrium quantity (increases; decreases; stays the same).
Correct. The supply increases and the supply curve shifts to the right and the equilibrium quantity increases.
Think again. The supply increases and the supply curve shifts to the right.
Think again. The supply increases and the supply curve shifts to the right.
The diagram below illustrates the impact of an increase in supply. Study the diagram and then answer the questions.
- Before the increase in supply, the equilibrium price was _______ and the equilibrium quantity was _____.
- Owing to an increase in supply, the supply curve shifts from S to S1. At a price of R10, after the increase in supply, the quantity demanded is _____ and the quantity supplied is _____ .
- At a price of R10, after the increase in supply, there is an (excess demand; excess supply).
- An excess supply at a price of R10 will lead to (a decrease in the price; an increase in the price).
- At a price such as R9, the quantity demanded is _____ and the quantity supplied is _______ and there is an (excess demand; excess supply) at this price.
- As long as there is an excess supply, the price will (increase; decrease).
- A new equilibrium position is formed after the increase in supply at an equilibrium price of ______ and an equilibrium quantity of _____.
- Before the increase in supply, the equilibrium price was R10 and the equilibrium quantity was 800.
- Owing to an increase in supply, the supply curve shifts from S to S1. At a price of R10, after the increase in supply, the quantity demanded is 800 and the quantity supplied is 1200.
- At a price of R10, after the increase in supply, there is an excess supply.
- An excess supply at a price of R10 will lead to a decrease in the price.
- At a price such as R9, the quantity demanded is 900 and the quantity supplied is 1 100, and there is an excess supply at this price.
- As long as there is an excess supply, the price will decrease.
- A new equilibrium position is formed after the increase in supply at an equilibrium price of R8 and an equilibrium quantity of 1 000.
Arrange the following elements to illustrate the chain of events that occurs for an increase in supply:
- Qd < Qs (excess supply
- ↑Supply
- ↓P →
- ↑Q
The correct sequence is ↑ Supply→ Qd Qs (excess supply) → ↓P and ↑Q