Question

With the help of a suitable diagram, explain the contraction of supply. 

Answer 1

Contraction of supply refers to a situation in which the amount provided of a commodity declines due to a decrease in its own price while all other parameters stay constant.

As the commodity price lowers from OP₀ to OP₁, the quantity supplied to this commodity reduces from OQ₀ to OQ₁. In this case, there will be a downward movement from A to B along the supply, where SS is referred to as supply contraction.