Theory question 103
Theory of Supply(a) With the aid of relevant diagrams, distinguish between an increase in supply and an increase in quantity supplied.
(b) Explain how a decrease in income tax will affect the demand for a normal good and an inferior good.
(c) Explain how an increase in the supply of a substitute will affect the demand for a commodity.
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(a) An increase in supply: more is supplied at every price because of factors other than the good's own price (technology, lower costs, subsidies); the whole curve shifts right (S0S0 to S1S1), at price P quantity rises from q0 to q1. An increase in quantity supplied: a movement up along the same supply curve caused by a rise in the good's own price (P1 to P2, q1 to q2).
(b) Lower income tax raises disposable income: demand for a normal good increases (curve shifts right); demand for an inferior good decreases (curve shifts left) as people switch to better goods.
(c) More supply of the substitute lowers its price, so consumers buy more of the substitute and demand for the commodity falls (its demand curve shifts left).
Shift of the curve versus movement along it.