Question

What effect does increased input prices have on the supply curve of a commodity? Draw a diagram to explain your answer.

Answer 1

If the prices of inputs rise, then the cost of production will increase. This will reduce the profit margin of the seller. As a result, the supply curve will shift to the left, indicating a decrease in supply.

In the diagram

• SS is the original supply curve.
• S₁S₁ is the new supply curve.
• A leftward shift in the supply curve indicates a decrease in supply.