Question

Show with the help of a diagram the effect on equilibrium price and quantity when there is a rise in the prices of inputs.

Answer 1

A rise in input prices (such as wages, raw materials, etc.) increases the cost of production for producers. As a result, firms supply less at each price level, leading to a leftward shift of the supply curve, while the demand remains unchanged. 

The diagram shows how equilibrium price and quantity are affected when supply changes and demand remains constant. Initially, supply curve S₀ and demand curve D intersect at point E₀, giving equilibrium price OP and quantity OQ₁. When supply increases (shift to S₁), the new equilibrium is at E₁, where price falls to OP₁ and quantity rises to OQ₃. When supply decreases (shift to S₂), equilibrium moves to E₂, where price rises to OP₂ and quantity falls to OQ₂.