How do falling prices affect supply?
I'm having a hard time between either the supply curve moves to the left and the quantity demanded rises.
I think the answer is that the quantity demanded rises.
When it comes to falling prices and their effect on supply, it's important to understand the concept of supply and the factors that influence it.
Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at different price levels. It is typically represented by a supply curve, which shows the relationship between price and quantity supplied.
Falling prices generally result in two possible outcomes:
1. Movement along the supply curve: When prices go down, producers may choose to offer a smaller quantity of the good or service. This movement along the supply curve occurs because at lower prices, producers find it less profitable to produce and supply the goods. As a result, the quantity supplied decreases.
2. Shift of the supply curve: In certain situations, falling prices may cause a shift of the entire supply curve. This happens when factors other than price influence the quantity producers are willing and able to supply. For example, a decrease in input costs or technological advancements can reduce the costs of production, making it more profitable for producers to supply larger quantities at each price level. In this case, the supply curve shifts to the right, indicating an increase in supply.
To determine whether falling prices cause a movement along the supply curve or a shift in the supply curve, we need to consider the specific circumstances and factors affecting supply. In general, if a decrease in price is the sole factor influencing supply, it is likely to result in a movement along the supply curve, and the quantity supplied will decrease. However, if other factors are also at play, such as changes in production costs or technology, the supply curve may shift, leading to an increase in the quantity supplied.
Therefore, in your case, if falling prices are the only factor affecting supply and assuming all other factors remain constant, it is more likely that the quantity supplied would decrease, rather than increase.
When prices fall, there are two main effects on supply:
1. Movement along the supply curve: A decrease in price leads to a movement along the existing supply curve. This is because suppliers are willing to supply a smaller quantity at a lower price due to reduced profit margins or to clear excess inventory.
2. Expansion of supply: Lower prices can also lead to an expansion in supply, where suppliers are willing to produce and sell a larger quantity at the new lower price. This occurs when lower prices make it more profitable for suppliers to enter the market or increase production. It is represented by a shift of the supply curve to the right.
In summary, falling prices generally lead to a movement along the supply curve (quantity supplied decreases), but can also result in an expansion of supply (quantity supplied increases) if suppliers are motivated to enter the market or increase production due to improved profitability.