Here, supply extends as a result of rise in the price of the commodity. In both the cases, the law of supply applies. Thus, the change in quantity supplied is the result of changes in price of the commodity in question, other things remaining constant.
It will be clear from the Fig. 3.3 that the change in quantity supplied (both extension and contraction) involve movement along the same supply curve with the changes in price. In this figure, the movement from point ‘A’ to point ‘B’ represents extension of supply, as quantity supplied has increased from OQ to OQ1 due to rise in price from OP to OP2.
Similarly, the movement from point ‘A’ to point ‘C’ represents contraction in supply, as the quantity supplied has decreased from OQ to OQ2 due to fall in price from OP to OP2
Fig. 3.3: Extension and Contraction of Supply
Change in Supply (Increase and Decrease in Supply):
The change in supply can be of two types. When the quantity of a commodity rises due to factors (other than price of the commodity in question) like an innovation or the discovery of a cheap raw material, use of better techniques, decrease in prices of other commodities, fall in excise tax, expectations of fall in the price of the commodities in future, etc., it is termed as increase in supply.
Increase in supply implies a rightward shift of the supply curve, showing that producers are willing to supply more at each price (or same quantity at a higher price). It is shown by shift in curve from SS to S’S’ in Fig. 3.4. On the other hand, when the quantity of commodity supplied falls at the same price, it is referred to as a decrease in supply.
It is represented by a leftward shift of the supply curve indicating that producers are willing to supply less at each price. It is shown by shift in curve from SS to S”S” in Fig. 3.4. If may be the result of obsolete technique of production, increase in the price of related goods, increase in the cost of production, rise in excise tax, etc. Thus, change in supply can be shown by shift in supply curve.
Fig. 3.4: Increase and Decrease in Supply
The important distinction between a shift of a supply curve and a movement along a supply curve is that, whereas a shift of the supply curve occurs due to a change in conditions of supply, price of the commodity remaining constant. While a movement along supply curve occurs due to a change in the price of the commodity, conditions of supply remaining constant.