4.5:
Effect of Shift in Supply Curve on Market Equilibrium
A change in supply or shift in the supply curve can influence the equilibrium price and quantity.
Consider a bicycle market.
If the government subsidizes bicycle manufacturing to encourage sustainable transportation, the supply curve shifts to the right while keeping the demand constant. This leads to a surplus of bicycles in the market.
To clear this surplus, sellers will supply at a lower price, resulting in a lower equilibrium price. As the price decreases, consumers will buy more bicycles, which increases the equilibrium quantity.
Conversely, if there is a shortage of steel, an important raw material for bicycles, the supply curve will shift left while keeping the demand constant. This leads to a shortage in the market.
To ration this limited supply, sellers will increase the price, resulting in a higher equilibrium price. As the price increases, some consumers will choose not to buy the product, which decreases the equilibrium quantity.
These shifts can significantly impact the market equilibrium and have ripple effects throughout the economy, influencing consumer behavior and production dynamics.
4.5 Effect of Shift in Supply Curve on Market Equilibrium
The dynamics of market equilibrium, defined by the balance between supply and demand, play a pivotal role in determining the prices and quantities of goods. A fascinating example of this principle can be observed in the technology sector, particularly in smartphone manufacturing.
Supply Increase: Imagine a scenario where a major technological breakthrough lowers production costs for smartphones. This innovation acts similarly to a government subsidy by increasing the supply of smartphones, represented by a rightward shift in the supply curve, assuming demand remains constant.
- • Result: With more smartphones available at lower production costs, competition between manufacturers may reduce prices to stimulate sales, leading to a lower equilibrium price and a higher equilibrium quantity.
Supply Decrease: On the flip side, a scarcity of lithium, a vital component for smartphone batteries, would constrict the supply. This limitation causes a leftward shift in the supply curve seen with material shortages without altering demand.
- • Result: To manage the dwindling supply, prices are driven up. The higher prices discourage some consumers from purchasing, thus decreasing the equilibrium quantity while increasing the equilibrium price.
These hypothetical scenarios underscore how shifts in supply can significantly influence market equilibrium.