CDS (II) 2023 General Knowledge · Question 68 of 120

Correct — A, 1 and 2 only. The two statements the key accepts are the two whose direction is fixed no matter what else is true of the market. A rise in the good's own price makes selling it more rewarding at the margin, so producers offer more of it — the law of supply, and an upward-sloping supply curve is nothing but a picture of that fact. A fall in the price of the factors of production works through cost: with cheaper inputs, the same output can be produced for less, output that was previously unprofitable becomes worth making, and firms are willing to supply more at every price, which shifts the whole supply curve to the right. Statement 3 is the one the key rejects. A change in the price of other goods only pulls resources between products when the producer can actually switch between them, and the statement never says that these are goods the firm could make instead. With nothing said about that relationship, the effect on this good's supply is not determined, and under the phrase 'other things remaining constant' the key treats it as no effect.

• (b)1 and 3 only — Drops the cheaper inputs, which is the clearest cost-side reason for supply to rise, and keeps the statement whose effect cannot be signed without knowing that the goods compete for the same resources.
• (c)2 and 3 only — Discards the law of supply itself. Whatever one thinks of statement 3, a higher own price bringing forth more of a good is the most basic proposition in the chapter.
• (d)1, 2 and 3 — The all-of-them pick, and the one a candidate who has learnt the textbook list of supply determinants will be drawn to. It is the closest of the four to being defensible, which is exactly why the item is hard.

Supply is the whole schedule of quantities a producer is willing to offer at each price, not a single quantity. Movements along a supply curve are caused by the good's own price; shifts of the curve are caused by everything else — input prices, technology, taxes and subsidies, the number of sellers, expectations, and the prices of goods the firm could produce instead with the same resources. Keeping the distinction between a movement and a shift straight is the single most useful habit in this part of the syllabus.

This item deserves an honest word. Standard textbook treatments do list the prices of other goods among the determinants of supply, on the reasoning that if those prices fall, producing them becomes less attractive and resources move to the good in question, raising its supply. Read that way statement 3 would be correct and the answer would be all three. The official key marks 1 and 2 only, and the reading that supports it is that 'other goods' here are not stated to be goods the firm could switch to producing, so their prices are among the 'other things' being held constant. The key decides, and it is the key that must be answered — but a candidate who reasoned to all three was not being careless. Worth noticing too that statement 1 describes a movement along the supply curve rather than a shift of it, so the stem is using the word supply loosely; the key accepts it all the same.

• The law of supply says quantity supplied rises with the good's own price, other things remaining equal.
• A fall in input prices lowers the cost of production and shifts the supply curve to the right.
• A change in the good's own price causes a movement along the supply curve; everything else causes a shift of the curve.
• Prices of goods that compete for the same resources can shift supply, but only where the producer can switch between them.
• Other shift factors include technology, taxes and subsidies, the number of sellers in the market and producers' expectations about future prices.

• Treating an own-price change as a shift of the supply curve. It is a movement along it.
• Assuming any change in the price of any other good must affect this good's supply; it does so only through competition for the same resources.
• Reversing the input-price effect. Cheaper inputs raise supply, dearer inputs reduce it.

As a statements item on the determinants of supply, or as a one-line question on whether a described change moves along the curve or shifts it.

• practice — not a real PYQ

  Which one of the following will cause a movement along the supply curve of a commodity rather than a shift of the curve?

  • (a)A fall in the wage rate paid by producers
  • (b)A rise in the price of the commodity itself
  • (c)An improvement in production technology
  • (d)The entry of new firms into the market

  Answer(b) A rise in the price of the commodity itself — own price moves you along the curve, everything else shifts it.

• practice — not a real PYQ

  A subsidy granted to producers of a good will, other things being equal,

  • (a)shift the supply curve to the left
  • (b)shift the supply curve to the right
  • (c)cause a movement upward along the supply curve
  • (d)leave the supply curve unchanged

  Answer(b) shift the supply curve to the right — the subsidy lowers the effective cost of production, so more is offered at every price.