Question

4. List and explain the factors that cause a change in supply.

5. Explain with the use of examples: consumer surplus, producer surplus, price ceiling and price floor.

Answer 1

Answer 4) the factors that cause a change in supply.

• Price of the commodity- There is direct relation in price of related good and quantity supplied. Increase in price of related good increase the quantity supplied.
• Goal of the firm- If the goal of the firm is to maximize profits then more supply will be done at high prices . But, it the motive of the firm is increase the sales then quantity will be supplied more even at low price.
• Change in technology - Improvement in technology decreases the cost of production and supply rise. No Improvement in technology increases the cost of production and supply falls.
• Prices of factor of production=-increase in factor payment increases the cost of production and supply fall . Decrease in factor payment decreases the cost of production and supply rise.
• Government policy _ Increase in taxation tends to reduce the supply and subsidies by government tend to increase the supply.

Answer 5) Consumer surplus- It is the surplus earned by the consumer. It is the difference is consumer willingness to pay and consumer actual pay. For example, Sham is a lover of cricket. To go to concert he is willing to pay $100 but in actual pays $40. Then consumer surplus is $ 60.

Consumer surplus= consumer willingness to pay -consumer actual pay.

$100- $40

= 60

Producer surplus -It is the difference between how much firm willing to accept for firm and in actual they get for the output. For example firm want to sale baby toy at $100 but sale at $120. $ 120 is the producer surplus.

Price floor-It is a government imposed price to prevent the prices to go below . It is mainly work for agriculture. So, farmers can get true prices for their crops. For example, It is like the minimum wage which should be given to firms . If government decides wheat prices as $ 69 then is a example of price floor. It should be higher than market price.

Price ceiling - It is also decided by the government. It must be below the market price. It is beneficial for the protection of consumer interest. Price limit on rent is an example of price ceiling.