Chapter 6, Problem 1FRQ

a)

To determine

The question requires us to draw a hypothetical supply curve.

Explanation of Solution

The following graph represents the hypothetical supply curve for cars:

  

Here, the upward-sloping curve S1 represents the supply curve for cars. It is a positively-sloped curve because there is a direct relationship between the price of a product and its quantity supplied.

Economics Concept Introduction

Any change in supply will shift the supply curve while any change in quantity supplied will cause the movement along the supply curve.

The supply of a commodity will change due to the following reasons:

• Change in price of relative goods (substitutes and complementary products) 
• Change in technology
• Change in input prices
• Change in expectations
• Change in the number of producers

Any change in the price of the commodity changes the quantity supplied.

b)

To determine

The question requires us to show the impact of discovery.

Explanation of Solution

The following graph represents the impact of discovery that lowers the price of lithium:

  

A fall in the price of lithium will reduce the input costs for producing cars and result in a higher supply.

A higher supply will shift the supply curve to the right from S1 to S2 as shown in the above figure.

c)

To determine

The question requires us to determine the impact of the expectation of sellers.

Explanation of Solution

The following graph represents the impact of change in the expectation of the suppliers on the supply curve:

  

When a firm expects the price of its product is going to increase next month, the firm will hold its production and not supply in the market to gain profit from a higher price in the next month.

So, an expectation of higher prices next month will decrease the supply of cars this month.

A fall in the supply of cars will shift the supply curve to the left from S1 to S2 as shown in the above figure.