Question

a. Define the law of supply and draw a Supply Curve labeling all the axes correctly.

b. List the "Ceteris Paribus" variables that affect supply and illustrate a shift in a Supply Curve

Answer 1

Answer - a

Law of supply - law of supply is a economic theory which states that keeping other factors constant, when the price increases it leads to increase in quantity supplied and when price decreases, quantity supplied also decreases.

Answer - b

Ceterus peribus variables that affect supply are :-

i) Price - price of a commodity is directly related to supply, which means as price increases quantity supplied also increases and as price decreases quantity supplied decreases.

ii) Price of other goods - The quantity supplied of a commodity not only depends on its price but also on the prices of othe commodity. Increase in price of other goods makes them more profitable than the given commodity.

iii) Prices of factor of production - When the prices of factors of production increases the cost of production also increases which leads to decrease in profit. As a result the seller reduces the quantity supplied of a commodity

iv) State of technology - Advanced technology reduces the cost of production which lead to higher profit margin, and encourages seller to increase the supply.

v) Government Policy - Increase in government taxes increases the coat of production which reduces the profit margin and leads to decreases the quantity supplied.

RIGHTWARD AND LEFTWARD SHIFT OF SUPPLY CURVE.

UPWARD AND DOWNWARD SHIFT OF SUPPLY CURVE.