After you have worked through this section of the learning unit, you should be able to:
- compare the impact on the market of an increase in supply with a decrease in supply
The impact of an increase in the supply of a good or service can be summarised as follows:
An increase in the supply causes the supply curve to shift to the right.
The impact of a decrease in the supply of a good or service can be summarised as follows:
A decrease in the supply causes the supply curve to shift to the left.
At the initial equilibrium price, excess supply (or surplus) develops in the market. In other words, the quantity supplied exceeds the quantity demanded.
At the initial equilibrium price, excess demand (or shortage) develops in the market. In other words, the quantity demanded exceeds the quantity supplied
The excess supply causes the price of the product to decrease, and the excess supply starts to decrease as the quantity demanded increases and the quantity supplied decreases.
The excess demand causes the price of the product to increase, and the excess demand starts to decrease as the quantity demanded decreases, and the quantity supplied increases.
This process continues until a new equilibrium is reached, where the price is lower and the quantity demanded and the quantity supplied are lower compared to the equilibrium position before the decrease in supply.
This process continues until a new equilibrium is reached, where the price is higher, and the quantity demanded and the quantity supplied are lower, compared to the equilibrium position before the decrease in supply.
Activity
If the equilibrium price decreases and equilibrium quantity increases in a market, we can conclude that a possible cause of this is that the supply has ______
The supply has increased. An increase in supply decreases the equilibrium price and increases the equilibrium quantity.
