How do the equilibrium price and quantity of a commodity change when price of input used in its production cha

Exercises · Q12

Q. How do the equilibrium price and quantity of a commodity change when price of input used in its production changes?

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Concept understanding — Supply And Demand Shift

The Everyday Intuition: Why Did My Chai Cost More Last Month?

Think about the chai-wala near your school. One month, a sudden cold wave hits your city. Everyone wants hot chai. The chai-wala can only make so many cups per hour. What happens? He might raise the price from ₹10 to ₹12. You grumble, but you still buy it because you're cold. That's demand shifting — more people wanting chai at every price.

Now imagine a different scenario: a truckers' strike makes milk and sugar expensive to transport. The chai-wala now has to pay more for his ingredients. He can't afford to sell chai at ₹10 anymore. He raises the price to ₹12 just to cover his costs. That's supply shifting — the cost of making chai has changed.

These two stories feel similar — price goes up in both — but the reason is completely different. And that difference is the entire point of this concept.

The Precise Meaning: What "Shift" Actually Means

In economics, demand and supply are not single numbers. They are schedules — a whole list showing how much buyers want (or sellers offer) at every possible price. We draw them as curves on a graph: price on the vertical axis, quantity on the horizontal.

A shift means the entire curve moves — left or right. This is different from a movement along the curve, which happens when only the price changes.

Important

Shift of the curve = a non-price factor changes (income, tastes, input costs, technology).

Movement along the curve = only the price changes.

Demand Shift

The demand curve shows: "At price ₹P, buyers want quantity Q." If something other than price changes how much people want, the whole curve shifts.

Rightward shift (increase in demand): At every price, buyers want more than before.

Leftward shift (decrease in demand): At every price, buyers want less.

What causes a demand shift? NCERT Class 12 (Introductory Microeconomics, Chapter 5) lists these factors:

Change in income: For normal goods, higher income → more demand at every price. For inferior goods (like cheap noodles), higher income → less demand.
Change in tastes/preferences: A health report praising green tea shifts its demand curve right.
Change in price of related goods:
- Substitutes (tea and coffee): If coffee becomes expensive, tea demand shifts right.
- Complements (petrol and cars): If petrol becomes expensive, car demand shifts left.
Expectations about future prices: If you think chai will cost ₹15 next week, you buy more today — demand shifts right now.
Number of buyers: More population → more demand at every price.

Supply Shift

The supply curve shows: "At price ₹P, sellers offer quantity Q." If something other than price changes their willingness or ability to sell, the whole curve shifts.

Rightward shift (increase in supply): At every price, sellers offer more.

Leftward shift (decrease in supply): At every price, sellers offer less.

NCERT lists these causes:

Change in input prices: Cheaper raw materials → supply shifts right. Costlier inputs → supply shifts left.
Change in technology: Better machines → produce more at same cost → supply shifts right.
Change in price of other goods (for multi-product firms): If a farmer can grow wheat or rice, and wheat price rises, they shift land to wheat — rice supply shifts left.
Expectations: If sellers expect higher prices next month, they may hold back stock today — supply shifts left.
Number of sellers: More firms enter the market → supply shifts right.
Taxes and subsidies: A tax on production shifts supply left (costs rise). A subsidy shifts supply right (costs fall).

Why It Matters: The New Equilibrium

The market price is determined where demand and supply curves intersect. That intersection is called equilibrium. When a curve shifts, the equilibrium changes.

Here is what happens in words (and you should draw this):

Case 1: Demand shifts right (increase in demand)

At the old price, there is now excess demand — buyers want more than sellers offer.
Sellers raise price. As price rises, some buyers drop out, and sellers produce more.
New equilibrium: Higher price, higher quantity. …

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A change in the price of an input directly affects production costs, causing the supply curve to shift, which in turn alters the equilibrium price and quantity of the commodity. An increase in input price raises costs, shifting supply left, leading to a higher equilibrium price and lower equilibrium quantity; a decrease in input price lowers costs, shifting supply right, resulting in a lower equilibrium price and higher equilibrium quantity.

The equilibrium price and quantity of a commodity are determined by the intersection of its demand and supply curves. When the price of an input used in the production of a commodity changes, it directly impacts the cost of production for firms. This change in production cost is a non-price determinant of supply, meaning it causes the entire supply curve to shift, rather than just a movement along the curve. The demand curve for the commodity, assuming no other changes, remains unaffected.

Let's consider the two scenarios:

1. Increase in the Price of an Input

When the price of an input (like raw materials, labor, or energy) increases, the cost of producing each unit of the commodity rises.

Impact on Production Costs: Higher input prices mean that firms face higher marginal costs for every unit they produce.
Impact on Profitability: At any given market price for the commodity, the higher production costs reduce the profit margin for producers. Some firms might even find it unprofitable to produce at the previous scale or at all.
Shift in Supply Curve: Because production is now less profitable at every possible price, producers are willing to supply a smaller quantity of the commodity to the market. This causes the supply curve to shift to the left (or upwards). A leftward shift indicates that at each price, a lower quantity is supplied, or to supply the same quantity, producers now require a higher price.
New Equilibrium: With an unchanged demand curve and a leftward shift in the supply curve, the new equilibrium point will be at a higher price and a lower quantity. Consumers will have to pay more for the commodity, and less of it will be available in the market.

Note

Graphically, if the original equilibrium is at $(P_1, Q_1)$ , an increase in input price shifts the supply curve from $S_1$ to $S_2$ (leftward). The demand curve $D$ remains unchanged. The new intersection point of $D$ and $S_2$ will be at $(P_2, Q_2)$ , where $P_2 > P_1$ and $Q_2 < Q_1$ .

2. Decrease in the Price of an Input

Conversely, when the price of an input decreases, the cost of producing each unit of the commodity falls.

Impact on Production Costs: Lower input prices mean that firms face lower marginal costs for every unit they produce.
Impact on Profitability: At any given market price for the commodity, the lower production costs increase the profit margin for producers. This makes production more attractive and profitable. …

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Q.How do the equilibrium price and quantity of a commodity change when price of input used in its production changes?

1. Increase in the Price of an Input

2. Decrease in the Price of an Input

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