Question

Currently, aggregate supply has fallen because of the corona virus. Which of the three determinants of supply mentioned above is associated with the drop of aggregate supply?

Answer 1

In the time of coronavirs the aggregate supply can be fall due to these reasons -

1) Increase in cost of production - As due to coronavirus , there is a social distancing which is usually in talks . To run the business through soical distancing , having less customers at a same time will lead to rise in the cost of production If a firm faces higher costs of production, then it will earn lower profits at any given selling price for its products. As a result, a higher cost of production typically causes a firm to supply a smaller quantity at any given price. In this case, the supply curve shifts to the left.

2) Decrease in number of firms - As due to period of lockdown , many firms are not able to incur there fixed cost and thousands of them them decided to go away and shut down there businesses which result in decrease in number of firms . And due to decrease in number of firms , supply curve shift leftwards .

3) Low business expectations - During the period of COVID 19 , there are low business expectations which are basically build in the mind of firms . And suppose after virus days , consumer will not came out for consumption suddenly , it will take time for market to settle down and hence this will prompt the producer to do less investment which shift the supply curve downwards .