What are Expansion of Supply and Contraction of Supply? – Explained!
For instance, if an improvement in technology or an advanced technology is adopted, more will be produced and supplied at the same price. In like manner, if input prices fall or subsidy is granted, production cost declines and more can be produced and supplied at the same price. An increase in supply generally leads to a downward parallel shift in the supply curve. Refer to Fig. 2.22(b).
Contraction of supply:
Contraction of supply is just opposite of its expansion. A fall in price offered leads to a fall in supply. It results in a downward movement along the supply curve. Refer to
Figure 2.23(a). Likewise, decrease in supply is just opposite of an increase in it. An unfavorable change in one of the shift factors leads to an upward to left shift in the supply curve. As mentioned earlier, the shift factors refer to all the other determinants of supply except the price offered by the market for the product. For instance, a rise in input prices, or a levy of excise duty raises the production cost and hence lowers the supply despite no change in price offered for the product by the market. Refer to Figure 2.23(b).