Question

1. (a) What are the six major factors that cause demand to supply? (b) How do each change supply? (c) Draw a graph to illustrate the change for each factor. (d) How does each shift affect equilibrium price and quantity?

2. Suppose the price of an input good used to make chocolate decreases. Explain and graphically show what will happen to equilibrium price and quantity of chocolate.

3. Suppose the price of gummy worms decrease. Explain and graphically show what will happen to equilibrium price and quantity of chocolate, assuming gummy worms and chocolate are substitutes.

4. Suppose the price of the input and the price of gummy worms decrease at the same time. Explain and graphically show what will happen to equilibrium price and quantity of chocolate.

Answer 1

1. (a) Six major factors that cause change in supply are :

Price.

Cost of production

Natural conditions

Technology

Factor prices

Price of related goods.

(b) How each factor affects supply:

1. Price : There is a direct relationship between price and suuply of a good. If the price of a good rises then supply of the good also rises and vice-versa. It represents the movement along the supply curve.

2. Cost of production: The supplier would supply less , when the cost of production increases or more than the market price . Therefore, when there are high costs , then there would be less supply of the good. And supply curve will shift to the left and vice-versa.

3. Natural conditions: These conditions directly affects the supply. If there is the time of drought then this would decrease the supply of agricultural goods. Depend on favourable or unfavourable conditions that supply would increase or decrease.

4. Technology : Better and advanced technology increases the production of a good , this results in increase in supply of the good.

5. Factor prices:As the input prices , then there the supply of good that used that input in the production would decrease and vice-versa.

6. Price of related goods: If the price of substitute rises then suppliers would increase the supply of the substitute good and supply of other good would decrease. Similalry, if the price of complement good rises , then supply of both goods increases.

(c) When there is change in price then it represented by the movement along the supply curve. Graph that illustrates the change of each factor other than price is shown below:

(d) When there is rightward shift in the supply curve , then equilibrium quantity rises and equilibrium price falls. And when there is leftward shift in the supply curve then the equilibrium quantity falls and equilibrium price rises.

2. When price of an input used in the production of chocolate decreases then supply of chocolate increases. THis will shift the supply curve to the right . And theequilibrium price of chocolate decreases and equilibrium quantity of chocolate would increase. This is shown in the below figure:

3. When the price of gummy worms decreases then consumers demand more of gummy worms and less of chocolates. Therefore, demand for chocolates would decreases and shift to the left . As a result, equilibrium quantity will decrease and equilibrium price will also decrease. This is shown in the below figure:

4. When the price of the input and the price of gummy worms decrease at the same time then , supply curve shift to the right because of decrease in the price of an input an demand curve shifts to the left because of decrease in the price of substitute. AS a result , equilibrium quantity will remain the same and equilibrium price will decreases. This is shown in the below figure: