Question

What is the likely effect on the supply of a good if the prices of the inputs used in production of that good fall? Explain.

Answer 1

When price of inputs (i.e., wages of labour, price of raw materias and fuel) used in the production of a good goes down, the unit cost of production will decline. At a lower cost of production, producers will increase the supply of the commodity, i.e., they would like to sell more quantity of the commodity at a given price. As a result the supply would increase implying that the supply curve will shift to the right.
The diagam illustrates the effect:

Effect of a fall in the price of inputs



In the diagram, the supply curve of a good is shown by SS curve.
With the fall in the price of inputs, the quantity supplied of the good rises from OQ to $O{Q}_1$ at the same price. The supply curve shifts rightward from SS to $S_1{S}_1$.