What is the relationship between costs of production and supply?

Question

BlackTom AI · Accepted Answer

Question restatement: What is the relationship between costs of production and supply?

Option a: 'Higher costs of production cause an increase in supply' – This is not consistent with supply theory. Higher production costs make production less profitable, so firms are typically less willing to supply the good at any given price, leading to a decrease or a leftward shift in supply, not an increase.

Option b: 'Lower costs of production cause an increase in supply' – This aligns with the standard supply relationship. When costs fall, production becomes cheaper, allowing firms to produce more at each price level. This tends to increase the quantity supplied and/or shift the supply curve to the right.

Option c: 'Lower costs of production cause a decrease in supply' – This contradicts the basic logic of supply. Decreasing costs make supplying goods easier and more profitable, not harder, so supply would not decrease.

Option d: 'Higher costs of production cause a movement along the supply curve' – While higher costs can influence supply, the typical result is a shift of the supply curve (a change in supply) rather than just a movement along the curve, which is usually triggered by a change in price of the good itself, not input costs.

Summary of reasoning across options: The core idea is that production costs affect profitability. Lower costs improve profitability and incentivize greater production, shifting supply right. Higher costs reduce profitability and discourage production, shifting supply left. Movements along the supply curve are primarily driven by changes in the good's own price, not by changes in input costs. The analysis shows option b best matches the standard supply behavior in response to changing production costs.

What is the relationship between costs of production and supply?

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