Question

What is 'change in supply'? Explain the effect of tax imposed on a good on the supply of the good.

Answer 1

Change in supply means a situation where there will be an increase or decrease in the quantity of a good supplied at a constant price. At a constant price, changes in other factors of production will cause a change in supply. The change will cause a forward or backward shift in the curve as (i) an increase in supply and (ii) a decrease in supply.

Assuming other things remain constant, the levy of a tax on a good shows a negative relationship with the supply of a good. When there is a tax on a good, the cost of production increases and decreases the profit of the producer. Hence, it leads to a decrease in the supply of a good which shifts the supply curve towards the left, i.e. S₂S₂ to S₁S₁.