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With the help of a diagram define decrease in supply. Discuss four factors which determine this phenomenon.

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Decrease in supply may be defined as a situation when less is demanded at the same price or same quantity is demanded at a higher price. In this diagram SS is the original supply curve and S1S1 is the new supply curve showing a leftward shift in the supply curve which indicates a decrease in supply.

Four factors causing decrease in supply: 

1. Change in Prices of Inputs: If the prices of inputs will rise, the profit from making of that product will fall due to a rise in the cost of production. Hence, if there is a rise in the price of inputs the producers will produce and sell relatively less amounts of X at a given price. This would cause a decrease in supply.

2. Changes in Technology: At any time, what is produced and how it is produced depends on the technology in use. A degradation in production technology, will lead to a rise in the average cost of production and reduce a firm’s profit. So the firms will supply less at a given price. This will cause a decrease in supply. 

3. Changes in the Goals of the Firm: The main goal of a firm is to maximise its profits. However, different firms may have other goals also. 

For example, some firms may want to avert risk and they may follow some safer lines of activity, although these lines promise lower probable profits. In this case, at each level of price, they may produce less than before causing the supply to decrease. 

4. Changes in the number of firms: If the number of firms supplying similar products increases in the market, then at each price level, the share of each firm in the market supply may fall. In that case, the individual supply curve would shift in a leftward direction.

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