Question

Some producers are chatting. Which one of the following quotations refers to a movement along the supply curve? "Raw material prices have sky-rocketed; we will have to pass the cost on to our customers." "Wage increases have forced us to raise our prices." "New competitors in the industry are causing prices to fall." "We anticipate a big increase in demand. Our product price should rise, so we are planning for an increase in output." "Our new, sophisticated equipment will enable us to undercut our competitors."

Answer 1

Statement 1 :"Raw material prices have sky-rocketed; we will have to pass the cost on to our customers." - This statement implies increase in the cost of production due to increase in raw material prices hence supply will reduce which implies a leftward shift of supply curve and leads to movement along the demand curve. Hence this doesn't lead to movement along the supply curve.

Statement 2 : "Wage increases have forced us to raise our prices." - This statement again implies increase in the cost of production due to increase in wages and hence will lead to leftward shift of supply curve and leads to movement along the demand curve due to increased cost and hence a reduction in the supply and increased prices. Therefore, this doesn't lead to movement along the supply curve.

Statement 3 : "New competitors in the industry are causing prices to fall." - This statement implies increased supply in the market of a given commodity hence supply curve will shift to right and leads to movement along the demand curve and ultimately leading to fall in the prices. Again this doesn't lead to movement along the supply curve.

Statement 4 : "We anticipate a big increase in demand. Our product price should rise, so we are planning for an increase in output.". This statement implies increase in the demand hence the demand curve will shift to right and when the demand curve shifts right and result in movement along the supply curve from point A to point B resulting in increased prices and output. Hence, this lead to movement along the supply curve.

Statement 5 : "Our new, sophisticated equipment will enable us to undercut our competitors." - This statement implies increased supply in the market of a given commodity due to efficient technology which enables the producer either to produce more output with same input or reduced cost for given level of output either of them will result in increased supply hence supply curve will shift to right and leads to movement along the demand curve and ultimately leading to fall in the prices. Again this doesn't lead to movement along the supply curve.