SUPPLY CURVE SHIFTS

When the suppliers’ costs change the supply curve will shift. For example, if someone invents a better way of growing wheat, then the amount of wheat that can be grown for a given price will increase. This creates a shift from a original supply curve S0 to a new lower supply curve S1 – a decrease in supply. This causes the equilibrium price to decrease from P0 to P1. The equilibrium quantity increases from Q0 to Q1 as the quantity demanded increases – an extension in demand. Notice that the price and the quantity move in opposite directions in a supply curve shift.

Conversely, if the supply increases, the opposite happens. If the supply curve starts at S1, and then shifts to S0, the price will increase and the quantity will decrease as there is a contraction in demand.