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Question
Examine the effect of (a) fall in the own price of good X and (b) rise in tax rate on good X, on the supply curve. Use diagrams.
Solution
(a) A decline in the own price of Good X shows a positive relationship with the supply of good. When the price declines from P1 to P2, there will be contraction of supply from Q1 to Q2. Hence, the supply curve will move downwards.
(b) Assuming other things remain constant, the levy of a tax on Good X shows a negative relationship with the supply of a good. When there is a tax on a good, the cost of production increases and decreases the profit of the producer. Hence, it leads to a decrease in the supply of a good which shifts the supply curve towards the left, i.e. S2S2 to S1S1.
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