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Question
What effect does increased input price have on the supply of a commodity? Draw a diagram in support of your answer.
Solution 1
As the cost of production for a firm increases due to a rise in input prices, the supply of the commodity decreases, causing the supply curve to shift to the left.
Solution 2
If the prices of inputs rise, then the cost of production will increase. This will reduce the profit margin of the seller. As a result the supply curve will shift to the left indicating decrease in supply. In the diagram
- SS is the original supply curve.
- S1S1 is the new supply curve.
- Leftward shift in supply curve indicates decrease in supply.
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