Answer to Question #171099 in Economics for Mahmud

Question

With the aid of appropriate diagrams discuss the effects of changes in demand on a supply curve and explain the major factors that bring about such a change

Answer 1

The change in demand doesn't affect the supply curve but there are some factors that affect supply directly. Production costs can affect supply. For example, an increase in price of steel - an important ingredient in manufacturing cars - will lead to increase the cost of producing of cars and, hence, will reduce the supply of cars. As a result, the equilibrium price of cars will rise from $P_1$ to $P_2$, the equilibrium quantity of cars will fall from $Q_1$ to $Q_2$ and the supply curve for cars will shift to the left (from $S_1$ to $S_2$).

The natural conditions (for example, the cold snap). If the cold snap hits the oranges, the price of the orange juice will rise from $P_1$ to $P_2$ (because the orange is input for the orange juice) and the quantity demanded will fall from $Q_1$ to $Q_2$. As a result, the supply curve will shift to the left (from $S_1$ to $S_2$) and supply of oranges decreases.

The new technology that allows the firm to produce at a lower cost. As a result, the supply curve will shift to the right: