Question

A decrease in supply can be brought about by (LO5) a) a price increase b) a price decrease c) a random event like a hurricane or an earthquake d) a change in consumers' tastes or preferences

Short answer

A decrease in supply can be brought about by a random event like a hurricane or an earthquake (option c). Natural disasters and other random events can disrupt the production process, making it more difficult for suppliers to provide the same quantity of goods as before, resulting in a decreased supply.

Step-by-step solution

Option A: A price increase

A price increase will not bring about a decrease in supply, as suppliers are generally more willing to supply more of a product when the price is higher. This is because higher prices will result in larger profits for the supplier.

Option B: A price decrease

A price decrease may or may not bring about a decrease in supply, depending on the elasticity of supply. Elasticity of supply refers to the responsiveness of the quantity supplied to changes in price. A decrease in price may lead to a decrease in supply if the supply is elastic, meaning that suppliers are quick to respond to changes in price. However, if the supply is inelastic, meaning that suppliers are not as responsive to changes in price, a price decrease may not lead to a significant decrease in supply.

Option C: A random event like a hurricane or an earthquake

A random event, such as a hurricane or an earthquake, can indeed bring about a decrease in supply. Natural disasters and other random events can cause disruptions to the production process, making it more difficult for suppliers to provide the same quantity of goods as before. As a result, the overall supply will decrease.

Option D: A change in consumers' tastes or preferences

A change in consumers' tastes or preferences might cause a decrease in the demand for a particular good, but it would not directly cause a decrease in supply. However, if the decrease in demand is large enough, it could lead suppliers to produce less of the good, resulting in a decrease in supply over time. To conclude, the correct answer to this exercise is: c) A random event like a hurricane or an earthquake

Key concepts

Elasticity of Supply

The elasticity of supply is a key concept in understanding how suppliers react to price changes. It refers to how responsive the quantity supplied is to a change in price. If we say supply is elastic, it means that suppliers can quickly increase or decrease the quantity they produce in response to changes in market prices.
For instance, if prices drop and the supply is elastic, suppliers might reduce the amount they produce because their profit margin is smaller. This implies that their production processes and inputs can be adjusted easily to meet different levels of demand. On the other hand, if the supply is inelastic, a drop in prices won’t impact the amount supplied much because suppliers may not be able to change their production levels swiftly.
Factors such as the time period for production change, availability of resources, and flexibility in production processes play a crucial role in determining the elasticity of supply.

• If adjustments can be made easily, supply tends to be more elastic.
• If adjustments require more time and cannot rapidly change, supply is inelastic.

This concept is significant because it highlights the potential challenges suppliers face when market prices fluctuate. They must consider their ability to adapt to these changes efficiently to maintain or boost profitability.

Natural Disasters

Natural disasters like hurricanes or earthquakes can drastically affect supply, causing what we call a supply shock. These unexpected events disrupt regular production activities, reducing the ability of suppliers to maintain normal output levels.
For example, a hurricane may damage factories, destroy necessary infrastructure, or cut off access to resources. As a result, suppliers are unable to deliver their usual quantity of goods to the market, causing a decrease in supply.

• Supply chain networks may be severely disrupted due to damaged transportation systems.
• Production facilities might need significant repairs before they can resume normal operations.
• Scarcity of raw materials or labor due to the disaster might hinder production.

These difficulties often lead to a temporary decrease in supply in the market, which can sometimes result in increased prices for the affected goods, given the lower availability.

Consumer Preferences

Consumer preferences play a vital role in shaping demand rather than supply. Preferences influence consumer choices, affecting which products have higher demand. While changes in tastes don’t directly decrease supply, they can indirectly influence supply decisions by affecting market demand.
For instance, if a new trend makes a product more popular, demand for it will increase. Suppliers, noticing the increased demand, might try to supply more of that product if they can do so profitably.
Conversely, a decrease in consumer interest for a product can lower demand significantly. Even though there’s no immediate decrease in supply, the reduced demand might eventually cause suppliers to cut back on production because fewer people are buying the product.

• Strong consumer preference can lead to increased demand, prompting suppliers to expand production.
• A shift away from a product can decrease demand, which may lead suppliers to produce less.

Thus, consumer preferences are a critical market force that drives supply decisions over time, depending on how demand levels change.