Question

Explain the effects of ‘increase’ in supply of a good on its equilibrium and equilibrium quantity. Use diagram.

OR

Explain the effects of ‘increase’ in supply of a good on its equilibrium price and equilibrium quantity with the help of a schedule.

Answer 1

Increase in supply means more quantity supplied at the given price. Supply curve shifts to the right from S1 to S2. This creates excess supply (E, A) at price OP. Since the firms are not able to sell what they produce, Competition among firms takes place, leading to fall in price. Fall in price leads to rise in demand and fall in supply. These changes continue till price falls to $O{P}_{2}O{P}_2$is the new equilibrium price and $O{Q}_2$ .