A supply curve
What does a supply curve illustrate? Other than its own price, what are the determinants of the supply of a commodity. What would make a supply curve shift to the right?
Imagine that the market for orange juice is in equilibrium at a price of $8 per gallon. Provide two demand-related and two supply-related reasons why the equilibrium price could fall to $7.00 per gallon.
What will happen to the market for orange juice if both producers and consumers believe that prices will rise in the near future? Explain your answer.
What will happen to the market for oranges if the government offers price supports to citrus producers? Who will gain and who will lose? Provide examples and explain your answer.
Why is it unfair or meaningless to criticize a theory as “unrealistic?” Provide examples and explain your answer.
Sample Answer
A supply curve illustrates the relationship between the price of a good and the quantity of that good that producers are willing to supply. The curve slopes upwards, which means that producers are willing to supply more of a good at a higher price.
Other than its own price, the following are the determinants of the supply of a commodity:
- The price of inputs: If the price of inputs (such as labor or raw materials) increases, the cost of production will increase, and producers will be willing to supply less of the good at any given price.
- Technology: If new technology is developed that makes it cheaper to produce a good, the supply curve will shift to the right.
- Expectations: If producers expect prices to be higher in the future, they may be willing to supply more of the good now, in anticipation of selling it at a higher price later.