Answer to Question #47883 in Microeconomics for Asad Badvi

Question

Q5. What are the determinants of supply? What happens to the supply curve when any of these determinants changes? Distinguish between a change in supply and a change in the quantity supplied, noting the cause(s) of each.
Q6. KEY QUESTION What effect will each of the following have on the supply of auto tires?
a. A technological advance in the methods of producing tires.
b. A decline in the number of firms in the tire industry.
c. An increase in the prices of rubber used in the production of tires.
d. The expectation that the equilibrium price of auto tires will be lower in the future than currently.
e. A decline in the price of the large tires used for semi trucks and earth-hauling rigs (with no change in the price of auto tires).
f. The levying of a per-unit tax on each auto tire sold.
g. The granting of a 50-cent-per-unit subsidy for each auto tire produced.

Answer 1

Q5. When price changes, quantity supplied will change. That is a movement along the same supply curve. When factors other than price changes, supply curve will shift. Here are some determinants of the supply curve.
1. Production cost: since most private companies’ goal is profit maximization. Higher production cost will lower profit, thus hinder supply. Factors affecting production cost are: input prices, wage rate, government regulation and taxes, etc.
2. Technology: technological improvements help reduce production cost and increase profit, thus stimulate higher supply.
3. Number of sellers: more sellers in the market increase the market supply.
4. Expectation for future prices: if producers expect future price to be higher, they will try to hold on to their inventories and offer the products to the buyers in the future, thus they can capture the higher price.
Q6. KEY QUESTION What effect will each of the following have on the supply of auto tires?
a. A technological advance in the methods of producing tires - supply increases.
b. A decline in the number of firms in the tire industry - supply decreases.
c. An increase in the prices of rubber used in the production of tires - supply decreases.
d. The expectation that the equilibrium price of auto tires will be lower in the future than currently - supply decreases.
e. A decline in the price of the large tires used for semi trucks and earth-hauling rigs (with no change in the price of auto tires) - supply decreases.
f. The levying of a per-unit tax on each auto tire sold - supply decreases.
g. The granting of a 50-cent-per-unit subsidy for each auto tire produced - supply increases.