Answer to Question #172375 in Microeconomics for Tayyaba

Question

Explain the following through graph:

Does a change in price of raw material lead to a movement along the supply curve or a shift in the supply curve? 

Answer 1

Costs of Production and Supply Curve Shift

.An increase in the price of raw materials leads to an increase in the cost of Production. As the aim of a firm is to increase profit. It will therefore tend to pass this to the customer as a form of price increase so at cater for the cost. The supply of goods at this price will also decrease till a new equilibrium is reached

Let the original supply curve be S1. If the price of raw material rises, the firm will wish to pass these onto the consumer and so the supply curve shift to S2. If, however, costs had fallen due to the introductionof new technology or government subsidies in production the cost of production reduces and therefore, firms might be willing to pass on the benefits to consumers by lowering prices. In this case the supply curve will shift to S3.