Question

You are a sheep farmer. Give three examples of a change that would reduce your supply of wool. Did you use a fall in the price of wool as one of your examples? Is it a valid example?

Short answer

Three factors reducing wool supply: disease, increased feed costs, new regulations. Price drop isn't a valid supply reduction example.

Step-by-step solution

Understand the Supply Chain

Consider what factors influence the supply of wool. The supply of wool, like any other goods, depends on various factors such as the number of sheep, their health, access to resources, production technology, etc.

Identify Factors Reducing Supply

Identify possible factors or changes that could lead to a reduction in the supply of wool. Examples include: (a) a disease outbreak among sheep, reducing the number of healthy sheep available; (b) an increase in feed costs making it expensive to maintain current levels; and (c) governmental regulations on sheep farming affecting production capacity.

Evaluate Price Influence on Supply

While a fall in the price of wool might not directly reduce the current supply, it affects the quantity supplied because producers might choose to supply less quantity at a lower price to maintain profitability. Thus, it's more about quantity supplied than shifting supply curves.

Check Validity of Price Change as an Example

Evaluate if a fall in wool prices should be considered a change in supply. Technically, a decrease in price results in a movement along the same supply curve (a change in quantity supplied), not a leftward shift of the supply curve (actual reduction in supply). Hence, it is not a valid example of a change in supply.

Key concepts

Supply Factors

In supply chain management, various factors can impact the supply of a product such as wool. For a sheep farmer, aspects like the number of sheep, their health, and access to essential resources play a crucial role. Each of these factors can enhance or reduce your ability to supply wool.

• A disease outbreak among sheep can drastically reduce supply as fewer healthy sheep are available for wool production.
• Increased feed costs can also hinder supply, as the farmer may struggle to maintain current levels due to budget constraints.
• Improvements in production technology can boost supply by making the shearing process more efficient.

Understanding these factors helps in assessing how supply can fluctuate depending on changing conditions.

Quantity Supplied

The term "quantity supplied" refers to the amount of a good or service that producers are willing to sell at a given price. This is distinct from the concept of "supply," which typically refers to the overall supply curve on a graph. With quantity supplied, it's all about movement along this curve.

• When the price of a good increases, producers are usually willing to supply more, assuming they'll make higher profits.
• Conversely, if the price drops, producers might supply less, as lower prices might not cover costs adequately.

To sum up, quantity supplied is about how much producers will sell at specific prices, changing with price fluctuations without altering the supply curve itself.

Price Influence on Supply

Price is an essential factor influencing the quantity supplied but not necessarily the supply curve itself. While changes in price cause movements up or down the supply curve, they don’t shift the curve itself.
When the price of wool falls, a sheep farmer might decide to reduce the quantity supplied to maintain profitability, not because they can't produce it, but because selling at lower prices doesn't make economic sense.

• This reaction is a shift in the quantity supplied at different price points, depicted as movement along the supply curve.
• This does not equate to a supply reduction; the supply curve remains constant in this scenario.

Therefore, while the price significantly impacts the market dynamics, it's crucial to distinguish between affecting supply and affecting the quantity supplied.

Governmental Regulations

Governmental regulations can have a profound impact on supply within various industries, including wool production. These rules can affect supply positively or negatively based on how they are implemented.

• Regulations that impose stricter health and safety standards can initially decrease supply as farmers adjust to new requirements.
• If governments subsidize wool production, perhaps to boost the industry, supply might increase as farmers benefit from financial assistance.
• Conversely, environmental regulations might limit land usage, impacting the number of sheep a farmer can maintain, thus reducing supply.

Clearly, understanding governmental regulations is critical for predicting potential shifts in supply and preparing for their economic impacts.