Question

1.use graphs and words to explain the market day supply, short run supply and long run supply

2.which of the following best explains why the price of many goods are decreasing in the current economic slump, yet sales are decreasing too?

a. demand curves have a positive slope during recessions. b. innovations have caused price and sales to decline. c. incomes have fallen. d. population has grown. e. people expect prices to begin rising soon.

Answer 1

1.

The supply curve gives the quantity the producers/firms willing and able to supply at each given prices. This is a depiction of the price-quantity relationship from the production side. There are three types of supply:

• Market day supply: Supply of a firm in a given day in the market. The market day supply is perfectly inelastic or cannot be changed once the producers bring their product to market. No matter what the price is, they cannot change the quantity of the product. Thus the market day supply is a vertical short line.
• Short run supply: The short-run supply is the amount of quantity produce willing and able to supply at different prices in the short run. In the short run, the firm faces input constraint as they cannot change the fixed inputs. therefore, the cost of producing output is higher in the short run. This makes the short run supply curve steeper.
• Long run supply: The long-run supply is the price-quantity relationship that depicts the quantity supplied by the producers at each different price. In the long run, as the firm can change its fixed input and substitute expensive inputs for a cheaper one, the firm has a lower cost of production. Hence, they can supply a higher amount at any given price. Therefore, the long run supply is flatter than its short run counterpart.

All of these curves are depicted in figure 1 below:

figure 1

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2.

A recession is a decrease in economic activity for two consecutive quarters. In the recession the income of the consumer decreases and demand for goods and services decreases.

• a) Demand curves have a positive slope for a special type of good. These are rare and demand for good does not change its relationship with the price according to the ups and downs in economic activity.
• b) Innovation causes the cost of the good to decline. This increases supply at each price. The market move along a demand curve, which increases the quantity and decreases price.
• c) In a recession, the income of the consumer decreases. Which causes a decrease in demand. The market moves along the supply curve. The quantity and price both fall as a result.
• d) Increase in population increases demand for a good and price and quantity.
• e) If people expect that prices will rise, they increase their demand in the current period.

Then the demand falls in one case, which is a fall in income. This is also consistent with the given scenario of recession. Then the correct option is: (c)