What is the effect of an increase in supply on the economy?

An increase in supply, such as that caused by a fall in producer costs causes prices to fall, and the quantity consumed to increase.
Diagrammatically, this is represented by an outwards shift of the supply curve. At the market price, we now have excess supply and so prices fall and quantity increases until we reach the new equilibrium (ceteris paribus). At a general level, both consumer and producer surplus increase, although this is dependent on the price elasticities of demand and supply.

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