To see how the procedure outlined in Shifting Supply operates let us consider the markets for lumber and mulch. If the price of lumber increases, the amount of lumber produced would increase and consequently so would the amount of mulch (they are joint products). The graph below shows the effects of an increase in the price of lumber on the supply of mulch. Originally we began at supply (S) and demand (D). This had an equilibrium price and quantity of P* and Q*. The increase in the supply of mulch is shown by the movement of the supply curve from S to S'. The new price and quantity is shown as P' and Q'. Notice that quantity increased from Q* to Q' and the price decreased from P* to P'. An increase in supply caused price to fall and quantity to rise.
An Increase in Supply