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Question
What is 'change in supply'? Explain the effect of tax imposed on a good on the supply of the good.
Solution
Change in supply means a situation where there will be an increase or decrease in the quantity of a good supplied at a constant price. At a constant price, changes in other factors of production will cause a change in supply. The change will cause a forward or backward shift in the curve as (i) an increase in supply and (ii) a decrease in supply.
Assuming other things remain constant, the levy of a tax on a good 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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