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Question
With the help of a suitable diagram, explain the contraction of supply.
Solution
Contraction of supply refers to a situation in which the amount provided of a commodity declines due to a decrease in its own price while all other parameters stay constant.
As the commodity price lowers from OP0 to OP1, the quantity supplied to this commodity reduces from OQ0 to OQ1. In this case, there will be a downward movement from A to B along the supply, where SS is referred to as supply contraction.
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