Question

Yesterday, seller \(A\) supplied 400 units of good \(X\) at \(\$ 10\) per unit. Today, seller \(A\) supplies the same quantity of units at \(\$ 5\) per unit. Based on this evidence, seller \(A\) has experienced a (an) a. decrease in supply. b. increase in supply. c. increase in the quantity supplied. d. decrease in the quantity supplied. e. increase in demand.

Short answer

None of the given options accurately describe the situation that seller A experienced, as the quantity supplied remained the same and we do not have enough information about the behavior of the buyers.

Step-by-step solution

Price: Yesterday, seller A supplied 400 units of good X at \(10 per unit. Today, seller A sells the same good at \)5 per unit. So the price has decreased from \(10 to \)5. Quantity: Seller A supplied 400 units of good X yesterday and also supplies 400 units today. So there is no change in quantity supplied. #Step 2: Analyze the options based on this comparison#

From the available options, we must consider each one according to the change in price and the associated change in quantity we found in Step 1. a. "Decrease in supply" would mean that the quantity supplied has decreased, but in our case, the quantity remained the same. So this option is not correct. b. "Increase in supply" would mean that the quantity supplied has increased, but again, the quantity remained the same. So this option is not correct. c. "Increase in the quantity supplied" would mean that the quantity has increased, but we found that the quantity remained the same. So this option is not correct. d. "Decrease in the quantity supplied" would mean that the quantity has decreased, but we found that the quantity remained the same. So this option is not correct. e. "Increase in demand" could imply that more people want to buy the good, but we only have information about the seller's price change and not about the behavior of the buyers. So this option might not be directly relevant. Based on our analysis, it seems that none of the given options accurately describe the situation that seller A experienced. However, it is important to note that although the original problem might have incorrect or incomplete options, we should still try to analyze the problem to the best of our abilities. In some cases, it might be necessary to inform the person who provided the problem about the potential issue with the options given.

Key concepts

Price Elasticity of Supply

Price elasticity of supply (PES) measures how responsive the quantity supplied of a good is to a change in its price. It's a key concept when understanding how markets adjust to changes in economic conditions. Generally, if suppliers are quick to increase production when prices rise, and decrease production when prices fall, the supply is said to be elastic. Conversely, if there's little to no change in the quantity supplied regardless of price changes, the supply is inelastic.

For example, the scenario with seller A and good X illustrates an inelastic situation: despite a significant price drop from \(10 to \)5, the quantity supplied remains unchanged at 400 units. This can happen due to several reasons, like long-term contracts, production constraints, or the nature of the product where changing supply isn't easy in the short term.

Understanding PES is crucial as it affects businesses' decisions on production and pricing strategy, and also has implications for tax policies and welfare economics.

Quantity Supplied

The quantity supplied refers to the specific amount of a good or service that producers are willing and able to supply at a given price within a certain timeframe. It's not to be confused with supply, which is the entire relationship between prices and the quantities that sellers are willing to sell, represented graphically as the supply curve.

In the given exercise, the quantity supplied by seller A remains constant at 400 units of good X, even when the price falls. This is an important observation because it indicates that, in this case, the seller's quantity supplied is not responsive to the price change – an indication of inelastic supply for this price range. However, for a comprehensive analysis, we need more data across different price levels.

Economic Principles in Education

Integrating economic principles into education equips students with a valuable framework for understanding how the real world operates. Concepts like supply and demand, price elasticity, and market equilibrium are foundational for understanding decision-making processes at both individual and institutional levels.

Educators can use real-life examples, such as seller A's pricing and quantity decisions, to illustrate these economic principles. When students see real-world applications of abstract concepts, their comprehension and retention improve. The critical thinking required to analyze such scenarios also hones their problem-solving skills, which are beneficial well beyond the confines of economics.

Supply Curve Analysis

Supply curve analysis involves looking at how the quantity supplied of a product changes in response to price changes. A supply curve typically slopes upwards from left to right, indicating that higher prices motivate producers to supply more of a good or service.

In the case of seller A, we can derive from the given data points that the supply curve is perfectly inelastic in the given price range since the quantity supplied didn't change with price. However, it's a rather unusual and extreme example. Normally, one would expect the supply curve to be upward sloping, reflecting that the quantity supplied would increase when the prices rise.

When analyzing a supply curve, it's essential to understand the underlying assumptions and market conditions that could cause shifts or movements along the curve. In classroom settings, drawing and manipulating supply curves help students visualize how supply reacts to different economic situations.