Question

5. Complete the chart below using the provided options: (12 marks) in Left (Inward Decreasc OR Incrcasc ortion Increase OR Decrease OR Option#2 Right (Outward) Cost to Produce Right (Outward Cost of Resources FallsDecrease Cost of Resourees Rises Increase Higher Taxes Lower Taxes Govemment Pays Subsidy For each of the ollioaning scenarios,explain if the supply curve for boomerangs is iing tothe right or lef, if there is an increase or decrease in demand, and explain why

Answer 1

Solution:

First thing to note is that the three things are exactly related. This is in the sense, if the cost of production would increase (decrease), the firms would supply less (more) at that same price in order to maintain the profits. Thus, it results in a leftward (rightward) shift in the supply curve, denoting that at a particular price, quantity supplied is lower (higher) than before.

Hence, for all given cases, what we really need to check is what increases the cost of production and what decreases the cost of production; rest will follow as explained above. Then:

1) Cost of resources falls:

Since, resources act as inputs in production of a commodity, boomerangs here, they contribute to the cost of production. So, as cost of resources fall, it means cost of production decreases, resulting in increase in amount of supply and a rightward shift in the supply curve.

2) Cost of resources rises:

As discussed in the above paragraph, now with increase in cost of resources, that is the cost of inputs have risen and so the cost of production increases. This results in decrease in amount of supply and hence, leftward or inward shift in the supply curve.

3) Higher Taxes:

Tax is part amount a firm (or at times, consumer) pays to the government towards society, from their own revenue or income. As the taxes increase, the firms pay more taxes on each unit of production. Since, higher taxes result in a higher cost incurred in form of taxes, resulting in increased cost of production. So, there will be decrease in the amount of supply and the shift in the supply curve will be inward or left.

4) Lower Taxes:

Again, following the above reasoning, lowering the taxes result in a lower cost of production. This will lead to higher amount of supply and so supply curve will shift outward, that is to the right.

5) Government pays subsidy:

Subsidy is opposite of taxes; it is the amount the government pays to the firms on production. This is like an extra revenue to the firm, hence it results in decrease in cost of production. Thus, the amount of supply will increase and supply curve will shift outward or to the right.

So, finally we have the following table:

	Cost to produce	Amount of supply	Supply curve shifts
Cost of resources falls	Decrease	Increase	Rightward
Cost of resources rises	Increase	Decrease	Leftward
Higher taxes	Increase	Decrease	Leftward
Lower taxes	Decrease	Increase	Rightward
Government pays subsidy	Decrease	Increase	Rightward