If firms must pay higher wages to workers, how does this affect supply?

Question

BlackTom AI · Accepted Answer

To tackle the question, I’ll examine what happens when firms must pay higher wages: a rise in wage costs affects producers’ willingness and ability to supply at each price.
Option a: 'Supply will contract.' This statement suggests a decrease in supply, which could be interpreted as the supply curve shifting left. However, it’s somewhat vague because it does not explicitly tie the change to higher production costs or explain the mechanism (costs shifting the supply curve). The answer is incomplete because it omits the cause (higher wages as the driver) and the explicit link to cost, making it less precise.
Option b: 'Supply will expand.' This is inconsistent with the scenario. Higher wages raise input costs, making production more expensive, so producers generally supply less at each price, not more. Thus this option contradicts the basic cost-curve shift intuition and can be dismissed.
Option c: 'Costs of production fall, so supply will increase.' This option states the opposite of the given condition. If wage costs rise, production costs do not fall; this statement misrepresents the direction of the effect and reverses the causal relationship.
Option d: 'Costs of production rise, so supply will decrease.' This option correctly identifies the mechanism: higher wages increase production costs, which reduces supply at each price, effectively shifting the supply curve to the left and resulting in a lower quantity supplied. The logic aligns with standard supply theory where higher input costs diminish supply incentives.
In summary, the reasoning hinges on the link between input costs and supply: higher wages raise costs, which reduces supply, while the other options either misstate the direction of the effect or lack the explicit causal connection between wage costs and supply behavior.

MUF0061 Economics Unit 1 - Semester 1, 2025 Supply - Video and Quiz

If firms must pay higher wages to workers, how does this affect supply?

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