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Explain the effect of the following on market supply of a good: (i) Increase in input prices(ii) Reduction in per unit tax. |
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Answer» (i) Increase in input prices: Change in price of raw material and remuneration of factors, (rent, wages, interest and profit) influence the cost of production of a commodity and thereby its supply. An increase in price of inputs, will increase the cost of production leading to a reduction in profit. This will make the producer reduce the supply of the commodity, shifting the supply curve to the left. (ii) Reduction in per unit tax: Government levies various taxes on production of goods, e.g., excise duty, etc. Such taxes influence supply because it adds to the cost of production. Reduction in per unit tax levied by the government will decrease the cost of production and increase supply by the firms due to higher profit margins. In this case the supply curve will shift towards the right. |
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