Question
Explain the concept of expansion-contraction and increase-decrease in supply with the help of diagram.
✓
Answer
- Introduction :
- The factor affecting supply is called determinate its of supply.
- The supply changes because of two things
- Change in supply due to change in price.
- Change in supply due to change in factors other than price.
- If other things remain constant, the change in supply due to changes in price is called expansion - contraction of supply.
- It is explained by the law of supply.
- Expansion and contraction of supply take place on the same supply curve but the points on supply curve changes.
- Generally an increase in price expands the supply and a decrease in price contracts supply.
- If the price of the good remains constant, the change in supply due to other factors are called increase-decrease in supply.
- An increase in supply shift the supply curve to the right and a decrease in supply curve to the left.
- In both cases new supply curve is parallel to original supply curve.
- Expansion and Contraction of Supply :
- If other things remain constant , the change in supply due to changes in price is called expansion - contraction of supply.
- We assume that other factors like price of factors of production, level of technology, policy of government, rumours about future prices, price of relative goods, number of firms are constant.
- An increase in price expands the supply and a decrease in price contracts the supply.
- Schedule and Diagram :
| Price of x Commodity (Rs.) | The supply of x Commodity (Units) |
| $20$ $30$ $40$ $50$ $60$ |
$200$ $300$ $400$ $500$ $600$ |
- The supply is measured on $X$ axis and Price is measured on $Y$ axis.
- When the price of $x$ commodity is $40$ the supply of $x$ commodity is $400$ units.
- It is shown by point a. if the price decrease to $Rs. 30$ the supply of $x$ commodity reduces to $300$ units.
- It is shown by point It shows that the supply of $x$ commodity decrease with a decrease in its price.
- This shows contraction of supply.
- When the price of $x$ commodity is $50$ the supply of $x$ commodity is $500$ units.
- If the price increases to $60$ the supply of $x$ commodity raises to $600$ units.
- It is shown by point $c.$
- It shows that the supply of $x$ commodity increase with an increase in its price.
- This shows expansion of supply.
- Expansion and contraction of supply takes place on the same supply curve.
- The expansion of the supply is shown by the movement from point a to c and contraction of supply is shown by the movement from a to b.
- In short, expansion and contraction of supply is price induced.
- Increase and Decrease in Supply :
- If the price of good remains constant, the changes in supply due to other factors are called increase- decrease in supply.
- If other factors like price of factors of production, Level of technology, Policy of government, Rumours about future prices, Price of relative goods, Number of firms etc. raises the supply then it is called increase in supply and if it reduced supply then it is called decrease in supply.
- In increase - decrease of supply, the position of supply curve changes.
- Schedule and Diagram :
| Price of apples in Rs. | Supply of apples in Kg. |
| 20 | 100 |
| 20 | 200 |
| 20 | 300 |
| 20 | 400 |
| 20 | 500 |
- The supply of $x$ commodity is measured on $X$ axis and price of $x$ commodity is measured on $Y$ axis.
- When the price of $x$ commodity is $Rs. 50$ supply of $x$ commodity is $200$ units which is represented by point a.
- Suppose the price of $x$ commodity remains same but changes in other factors raise the supply to $300$ units which shown by point b.
- An increase in supply shifts the supply curve to the right The new supply $S1 \ S1$ curve is parallel to $S0 \ S0$.
- The movement from point a on $S0 \ S0$ to point b on $S1 \ S1$ is called increase in supply.
- When the price of $x$ commodity is t $50$ supply of $x$ commodity is $200$ units which is represented by point a.
- Suppose the Price of $x$ commodity remains same but changes in other factors reduces the supply to $100$ units which is shown by point c.
- The decrease in supply shifts the supply curve to the left.
- The new supply $S2 \ S2$ curve is parallel to $S0 \ S0$.
- The movement from point a on $S0 \ S0$ to point c on $SA$, is called decreases in supply.
- In short, if the price of goods is constant, a decreases in factor cost, decreases in production cost, policy of government in, changes in technology, increase in number of firms etc. raise the supply of $x$ commodity.
- Similarly, increase in factor prices, increase in production cost, unfavorable policy of government etc. reduces the supply of $x$ commodity.
- An increase in supply shift the supply curve to the right and a decrease in supply curve shifts the supply curve to the left.
Need a full question paper?
Generate a complete, print-ready paper with questions like this in minutes — across 16+ boards, with answer keys.
Explore more
Similar questions
State and explain the types of budget.
Describe the expenditure method for measuring national income.
Clarify the different between Micro Economics and Macro Economics.
Explain the production (output) method for measuring national income.
Explain Classification of Market – According to location and quantity.
Explain an individual and market supply with the help of diagram.
Explain the budget of local $($self$)$ government institution with the details of income and expense.
→Explain the concept of fixed cost, variable cost and total cost with diagram.
Define demand and explain factors affecting demand.
Give the meaning of privatization and explain its process in India.