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Demand Demand-Supply-SupplyShift.gif pg-10
Supply Shifts Back as Firms Exit an Industry

Consider the graph to the right which might depict the supply curve for VHS Camcorders. Over the last few years, DV video recorders and other digital format video cameras have replaced camcorders based the VHS analog format as the most popular format for recording on consumer-grade video cameras. Many fewer firms manufacture and sell VHS Camcorders. This leads to a shift back in supply, as shown to the right. The graph shown is not based on any real data. It's merely an illustration of how supply might shift for an industry whose products have grown less popular leading some firms to exit the industry.

Supply curve S1 could be the supply of consumer-grade VHS camcorders ten years ago, and supply curve S2 could be the supply curve of consumer-grade VHS camcorders now.26 The shift back in supply indicates that fewer such camcorders are being produced and sold, at every price than was the case ten years ago.

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If we were concerned about real data, we would want the price on the vertical axis to be adjusted to account for inflation over the time period between the two supply curves. None of this is crucial for understanding the effects of firms exiting an industry.

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