Q.

Explain using a relevant diagram why an increase in the price of a good or service will lead to an
increase in the quantity supplied but an increase in supply leads to a fall in selling price.

Supply indicates the various quantity of goods that a firm can produce and sell at different prices during
a time. This is shown on a supply curve, where the quantity of goods supplied is on the x-axis and the
price is on the y-axis. The supply curve can shift at different periods of time, to either increase or
decrease.

The adjoining figure depicts a supply curve, with

quantity and price shown for a certain good. As shown
on the supply curve, as the price increases from P1 at A
to P2 at B, the quantity shown increases from Q1 to
Q2, where Q2 is higher than Q1. As the price of the
good increases, the firm selling the good is more
motivated to sell an increased quantity, due to an
increased quantity sold yields more profit. So, as the
price of the goods sold rises, the quantity also
increases to make more profits for the company. This
direct relationship between the quantity and the price
is depicted with a straight line on the graph.

This diagram shows the supply curve S1 that has been

shifted to the right to form S2. The diagram shows an
increase in supply as seen by the rightwards shift of
the graph, indicating more supply. The selling price is
denoted on the y-axis. At the quantity Q shown on
the graph, the selling price for S1 is P1, whereas the
selling price for S2 is P2. In this case, the company
may have an excess of supply that the company needs
to sell off, which they would do at a reduced price to
earn the same amount of profit. This supply may also
result due to an effort to reach market equilibrium,
where a decrease in demand for a good may result in
a similar decrease in supply to reach an equilibrium
point.

In conclusion, the supply curve can shift resulting in the prices decreasing. The prices can also influence
the quantity of goods supplied, which can result in an increase or decrease along the axes.