Question

What is 'changed in supply'? Explain the effect of tax imposed on a good on the supply of the good.

Answer 1

Change in Supply is caused due to the change in all other variables other than the price of a good (i.e. price of the good remains same).The change in supply is graphically known as Shift in the supply curve. The shift in the curve can be of following two types:

1. Increase in Supply

2. Decrease in Supply

Other things remaining constant, imposition of the tax on a good negatively affects its supply. This is because tax increases the cost of production of the good. The high cost of production will discourage the producer, thereby supply will decrease from $S_2{S}_2$ to $S_1{S}_1$. Graphically, it is shown as: