Question

Define the law of supply and draw a supply curve labeling all the axes correctly. b) list the `ceteris paribus? that effect supply and illustrate a shift in a supply curve.now discuss how a change in each of these variables would lead to the shift you have illustrated in your drawing and explanation

Answer 1

Law of Supply states that keeping other factors constant, price and qty. supplied of a good are positively related to each other. It means that more will be supplied at a higher price and less will be supplied at a lower price.

The ceteris paribus assumption :- Supply curves relates only prices and quantities supplied by assuming no change in other factors.

Supply curve shift :- It means shift of supply curve due to factors other than price own commodity.

Factors Affecting Supply :-

(1). Price of Inputs :-

Case (a). Rise in price of inputs - This rise in price of inputs will increase cost of production, which will decrease the profit margins of the producer and thus, will shift the supply curve to the left.

Case (b). Fall in price of inputs - This fall in price of inputs will decrease cost of production, which will increase the profit margins of the producer and thus, will shift the supply curve to the right.

(2). Technology used :-

Case (a). Technological Advancement :- This technological progress will decrease cost of production, which will increase the profit margins of the producer and thus, will shift the supply curve to the right.

Case (b). Inferior Technology :- This inferior technology will increase cost of production, which will decrease the profit margins of the producer and thus, will shift the supply curve to the left.

(3). Change in Govt. Policy :-

Case (a). Tax imposed :- Govt. imposes various types of taxes on production such as sales tax, custom duty, excise duty, etc.. This will increase cost of production, which will decrease the profit margins of the producer and thus, will shift the supply curve to the left.

Case (b). Subsidies Given :- Subsidy is the kind of help given by the govt. to the producers. This will decrease cost of production, which will increase the profit margins of the producer and thus, will shift the supply curve to the right.