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Question

How do the equilibrium price and quantity of a commodity change when price of input used in its production changes?
 


Solution

An increase in the price of an input used in the production of a commodity increases the unit cost of production of the commodity. This will cause a decrease in the supply of a commodity and leads to a leftward shift of the supply curve as shown in the diagram given. The demand curve of the commodity remains the same and this will cause the market price of the commodity to rise and quantity exchanged to fall.
It is clear from the diagram that as a result of a decrease in supply, the supply curve shifts leftward. As a result, the price rises from OP to OP1 and the quantity falls from OQ to OQ1.

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