Answer to Question #187808 in Microeconomics for Rimsha

Question

It is due to the common ritual of hoarding and black marketing that price of

sugar in Pakistan is increased almost as double to its previous price in the

Holy month of Ramzan. Unfortunately, due to this, producers are earning

major profits because they are supplying more sugar at higher prices while

the demand of sugar is also increasing day by day. Do you think that such

scenario prevails in economics? If yes, than review this scenario in pure

Economic Perspective? Justify your answer by using appropriate diagram

and table.

Answer 1

This scenario means an artificially created deficit since the demand for sugar is disproportionate. We are dealing with non-price factors that influence the supply.

Non-price factors affecting supply

1. The cost of resources. Resource prices determine production costs. Consequently, the higher the costs, the lower the supply, and vice versa.

For example, prices for raw materials have decreased.

2. Technology. The use of advanced technology reduces the cost of production. At given prices for resources, production costs are reduced, and, consequently, supply increases. The curve is shifted to the right. If there is an increase in the cost of production, then this will cause a shift in the supply curve to the left.

3. Taxes and subsidies. Raising taxes reduces the opportunities for producers, reduces production volumes, which leads to a shift in the supply curve to the left. With the reduction in taxes, the picture is reversed.

Subsidies are government subsidies, assistance to certain producers. This contributes to the growth of production and supply, shifts the supply curve to the right.

4. Expectations. In anticipation of price increases, manufacturers sometimes hold back the product in order to create a temporary shortage of the product and accelerate price increases.

5. Competition. The more firms on the market, the greater the supply, and vice versa.

Non-price factors lead to a change in supply, which is expressed in a shift in the supply curve: to the right, if the supply increases, and to the left, if the supply decreases.

Graphically, it looks like this.