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 c) a random event like a hurricane or an earthquake.

Step-by-step solution

Understanding the concept of supply

Supply refers to the quantity of a product or service that producers are willing and able to produce at various price levels, holding all other factors constant.

Recall factors affecting supply

Some factors affecting supply include: 1. Prices of raw materials 2. Technology 3. Government policies and taxes/subsidies 4. Weather conditions (for agricultural products) 5. Number of suppliers

Evaluate each option in relation to supply

a) A price increase - This would typically lead to an increase in supply as producers are more willing to supply at higher prices. Therefore, this option does not align with the requirement of a decrease in supply. b) A price decrease - This would usually lead to a decrease in supply as producers are less willing to produce when prices are lower. However, the question is asking for a factor that can "bring about" a decrease in supply, and the price decrease is an outcome of a decrease in supply, not a cause. c) A random event like a hurricane or an earthquake - Random events, such as natural disasters, can affect the production and distribution of goods and services. These events can disrupt the supply chain and force producers to cut back on production, thus leading to a decrease in supply. d) A change in consumers' tastes or preferences - This factor influences the demand for a product, not the supply directly. However, if consumers' tastes or preferences change and demand for a product decreases, producers may reduce their supply in response.

Select the most appropriate answer

The option that best describes a factor that can "bring about" a decrease in supply is: c) A random event like a hurricane or an earthquake

Key concepts

Factors Affecting Supply

Supply is influenced by various elements, which shape the decision-making of producers. Understanding these factors helps grasp why supply may increase or decrease. Here are some key factors affecting supply:

• Prices of Raw Materials: If the cost of materials needed to produce goods rises, the supply may decrease because production becomes costlier.
• Technology: Advancements can increase supply as they often make production more efficient, lowering costs and enabling higher production levels.
• Government Policies: Taxes can discourage production by increasing costs, while subsidies can encourage more supply by providing financial support.
• Weather Conditions: Particularly significant for agriculture, adverse weather can lead to reduced supply due to crop failures or damage.
• Number of Suppliers: An increase in the number of suppliers typically boosts the market supply, while fewer suppliers can reduce it.

Understanding these factors is crucial in predicting supply changes and making informed economic decisions.

Natural Disasters

Natural disasters are unpredictable events that can have significant impacts on supply. These include hurricanes, floods, earthquakes, and other catastrophic occurrences that disrupt normal life.

When a natural disaster strikes, several aspects of supply are affected:

• Disruption of Supply Chains: Natural disasters can destroy infrastructure, such as roads and bridges, making it difficult to transport goods from producers to consumers.
• Reduction in Productivity: Factories and farms may be directly damaged, leading to a halt in production and thus, a decrease in supply.
• Resource Scarcity: Essential resources needed for production may become unavailable, further contributing to the supply decrease.

As these events are beyond human control, they pose a persistent risk to supply stability and require strategic planning and response measures.

Production and Distribution

The processes of production and distribution are crucial in determining the supply of goods. Production refers to the creation of goods or services, while distribution involves delivering these goods to consumers. Both processes are interdependent and directly influence supply levels.

• Efficiency in Production: Efficient production methods, often driven by technological advancements, can enhance supply by reducing costs and increasing output.
• Distribution Channels: Effective distribution ensures that products reach the market promptly. Any disruptions, such as transportation strikes or logistical mishaps, can lead to supply shortages.
• Storage and Inventory Management: Proper storage facilities and inventory strategies are essential to maintain an even flow of supply, particularly when demand fluctuates.

Strategic management of both production and distribution processes is essential in maintaining a stable supply, ensuring market needs are consistently met.

Microeconomics Concepts

Microeconomics is the branch of economics that examines the behavior of individuals and firms in decision-making about the allocation of resources. It introduces essential concepts that help understand supply dynamics.

• Supply and Demand: A fundamental concept illustrating how the market price of a good is determined by the relationship between its supply and demand.
• Elasticity: This measures the responsiveness of the supply or demand of a good to changes in price. Inelastic goods have little change in supply or demand when prices fluctuate.
• Market Equilibrium: Achieved when supply equals demand, resulting in a stable market price for the good.
• Opportunity Cost: Represents the cost of forgoing the next best alternative when making a decision, often influencing supply decisions such as resource allocation.

Understanding microeconomic principles is critical in evaluating how supply behaves under various market conditions and helps in developing strategies to navigate economic complexities.