Explain with the help of diagrams the effect of the following on the supply of a good:
(i) A rise in the rate of excise duty.
(ii) An increase in the price of other goods.
Explain with the help of diagrams the effect of the following on the supply of a good:
(i) A rise in the rate of excise duty.
(ii) An increase in the price of other goods.
(i) A rise in the rate of excise duty. When the rate of excise tax is increased by the government, the unit cost of production will rise. With the higher cost of production, less would be supplied than before at the given price, i.e., supply would decrease implying that the supply curve would shift to the left. The diagram illustrates the effect.
In the diagram, the supply curve of a good is shown by SS curve. With the rise in the rate of excise duty, the quantity supplied of the good decreases from OQ to OQ1 at the same price. The supply curve shifts leftward to S1S1.
(ii) An increase in the price of other goods. Suppose a farmer produces two goods- wheat and rice. If the price of rice rises, then it would be profitable for the farmer to produce more rice. The farmer would withdraw some land and other resources from the production of wheat and devote them to the production of rice, the price of which has risen. This would decrease the supply of wheat implying that the supply curve of wheat would shift to the left. The following diagram illustrates the effect:
In the diagram, the supply curve of a good is shown by SS curve. With an increase in the price of the other good (say rice), the quantity supplied of the good (say wheat) decreases from OQ to OQ1 at the same price. The supply curve of wheat shifts leftward to S1S1.
(i) A rise in the rate of excise duty. When the rate of excise tax is increased by the government, the unit cost of production will rise. With the higher cost of production, less would be supplied than before at the given price, i.e., supply would decrease implying that the supply curve would shift to the left. The diagram illustrates the effect.
In the diagram, the supply curve of a good is shown by SS curve. With the rise in the rate of excise duty, the quantity supplied of the good decreases from OQ to OQ1 at the same price. The supply curve shifts leftward to S1S1.
(ii) An increase in the price of other goods. Suppose a farmer produces two goods- wheat and rice. If the price of rice rises, then it would be profitable for the farmer to produce more rice. The farmer would withdraw some land and other resources from the production of wheat and devote them to the production of rice, the price of which has risen. This would decrease the supply of wheat implying that the supply curve of wheat would shift to the left. The following diagram illustrates the effect:
In the diagram, the supply curve of a good is shown by SS curve. With an increase in the price of the other good (say rice), the quantity supplied of the good (say wheat) decreases from OQ to OQ1 at the same price. The supply curve of wheat shifts leftward to S1S1.
