# Decrease in Supply

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 market supply decreases

Let us use our step approach to see what happens in this market if the supply of fried chicken pieces decreases. This might be due to an increase in the cost of production.

### Assume that the cost of electricity increases, which increases the cost of producing fried chicken pieces. What would happen to the supply of fried chicken pieces?

The supply of fried chicken pieces would decrease since suppliers will now require a higher price to supply the same quantity.

### Would this decrease in the supply of fried chicken pieces cause a rightward or leftward shift of the supply curve for fried chicken pieces?

It would be a leftward shift, which would indicate that at each price, the quantity supplied is lower, or at each quantity, a higher price is required.

The diagram below indicates the end result of a decrease in the supply of fried chicken pieces. What happened to the equilibrium price and the equilibrium quantity?

### A decrease in supply

Using a comparative static analysis, a comparison of the initial equilibrium, E, with the new equilibrium, E1, indicates that the equilibrium price increased and the equilibrium quantity decreased.

### Watch the following video:

#### Activity

The next activity relates to the adjustment process in the event of a decrease in supply. Do the activity to see if you are able to explain the adjustment process in a market when the supply decreases.

### Use the diagram below, which illustrates the market for ice cream, to explain what happens to the equilibrium price and quantity if the cost of milk, which is an input in the production of ice cream, increases:

This is a change in a (demand factor; supply factor).

Think again.  It is the cost of production that has changed.

Correct.  The cost of production is a supply factor.

Think again.  We are dealing with supply and not demand.

Think again.  We are dealing with supply and not demand.

Think again.  The cost of production has increased.

Correct.  The increase in the price of milk decrease the supply.

The (demand curve; supply curve) shifts to the (right; left).

Think again.  We are dealing with supply.

Correct.  It is the supply curve that shifts.

Think again.  The cost of production has increased and therefore the supply curve shifts to the left.

Correct.  The cost of production has increased and the supply curve shifts to the left to indicate a decrease in supply.

An (excess demand; excess supply) is created.

Correct.  At the original market price the quantity demanded exceeds the quantity supplied.

Think again. At the original market price the quantity demanded exceeds the quantity supplied.

The price (increases; decreases).

Correct.  An excess demand leads to an increase in the price.

Think again.  It is an excess supply that decrease the price.

Think again.  An increase in price decreases the quantity demanded.

Correct.  An increase in price decreases the quantity demanded.

Correct.  A higher price increases the quantity supplied.

Think again.  A higher price increases the quantity supplied.

Correct.  As the price increases the quantity demanded decreases and the quantity supplied increases and the excess demand therefore decreases.

Think again. As the price increases the quantity demanded decreases and the quantity supplied increases and the excess demand therefore decreases.

The process will continue until a new equilibrium is reached, where the price will be (higher; lower) and the quantity (higher; lower).

Correct.  The equilibrium price is indeed higher.

Think again.  The equilibrium price is higher.

Think again. The equilibrium price is higher.

Correct. The equilibrium quantity is indeed lower.