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Explain the effects of rightward shift of supply curve of a commodity on its price and quantity demanded and supplied.

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Market equilibrium is a situation where market demand ii equal to market supply. Effect of increase in supply of a good on equilibrium price and equilibrium quantity is discussed with reference to figure.

In figure, S1S1 is the initial supply curve, crossing demand curve DD at point E., which is the point of initial equilibrium. Now, owing to an increase in supply, supply curve shifts to the right, from S1S, to S1S1

As an immediate impact of increase in supply, there is excess supply, equal to EF (at the existing price). Due to the excess supply (and sluggish demand), price of the commodity tends to be lower than the equilibrium price. At lower price, quantity demanded tends to extend. Extension of demand occurs from point E towards point K. However, at lower price, quantity supplied tends to contract. The contraction of supply occurs from point F towards point K. The process of extension of demand and contraction of supply (triggered by the lowering price) continues till the excess supply is fully exhausted. K is the point of new equilibrium where the market clears itself once again. Corresponding to the new equilibrium, quantity demanded is equal to the quantity supplied, i.e., OQ2. And, equilibrium price is OP2.

Thus, the net effect of increase in supply is:

(a) equilibrium price reduces from OP1 to OP2, and

(b) equilibrium quantity rises from OQ1 to OQ2.

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