(a) Define increase in supply. [4 marks] (b) With the aid of diagrams, explain the effect of an increase in the supply of fish on the price of beef [16 mark...

Answer Details

(a) Increase in supply. An increase in supply means that producers are willing and able to offer more of a good at every price, caused by factors other than the good's own price (for example, improved technology, a fall in the cost of inputs, more producers, or good weather). On a diagram it is shown as a rightward shift of the whole supply curve. It must be distinguished from an extension of supply, which is a movement along a fixed supply curve caused only by a rise in the good's own price.

(b) Effect of an increase in the supply of fish on the price of beef. Fish and beef are substitutes, that is, either can be used in place of the other. The effect works in two connected markets.

• In the fish market: the increase in supply shifts the supply curve of fish to the right. With demand unchanged, the equilibrium moves down along the demand curve, so the price of fish falls and the quantity of fish traded rises.
• In the beef market: because fish is now cheaper, consumers switch away from beef towards fish. This reduces the demand for beef, shifting the demand curve for beef to the left. With supply of beef unchanged, the new equilibrium is at a lower price of beef and a smaller quantity of beef traded.

So an increase in the supply of fish, by lowering the price of fish (a substitute), causes the demand for beef to fall and the price of beef to fall.

Examination takeaway: keep the two markets separate, a supply shift in the fish market versus a demand shift in the beef market, and state clearly that fish and beef are substitutes, which is the link that carries the effect across.