How do the equilibrium price and quantity of a commodity change when price of input used in its production changes?
a) If the price of input of a firm will increase, the cost of production will also increase, which will decrease the profit margin due to which the supply will fall. This will lead to leftward shift in the supply curve. The demand curve remaining the same, the new equilibrium will occur at E1 with higher equilibrium price P1 and lower quantity of output Q1.
b) If the price of input of a firm will decrease, the cost of production will reduce which will increase the profit margin and the firms will supply more. This will shift the supply curve rightward. Demand curve remaining the same, the new equilibrium will occur at E1 with lower equilibrium price P1 and higher quantity of output Q1.
