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Difficulty: HardConcept and Law of Supply

In a competitive market, an increase in the market price of locally manufactured footwear leads producers to allocate more resources to expand output. Assuming all other factors remain constant, which of the following correctly describes this producer response?

  1. An expansion of quantity supplied, represented by a movement upward along the existing supply curveAnswer
  2. B
    An increase in overall supply, represented by a rightward shift of the supply curve
  3. C
    A contraction of quantity supplied, represented by a movement downward along the supply curve
  4. D
    A reallocation of production quotas established by central economic authorities

Answer

The economic response is an expansion of quantity supplied, represented by a movement upward along the existing supply curve.
The correct response highlights that an increase in the market price of a commodity, assuming all non-price factors remain constant (ceteris paribus), causes an expansion of quantity supplied. Graphically, this is shown as an upward movement along the existing supply curve rather than a shift of the curve itself.

Step-by-Step Solution

1
Identify the primary cause of the producer reaction
The change is triggered solely by an increase in the market price of the commodity itself, while all non-price determinants are held constant (ceteris paribus).
The law of supply specifically defines the direct relationship between price and quantity supplied.
2
Distinguish between a change in quantity supplied and a change in supply
A change in own-price leads to a movement along an existing supply curve, whereas changes in non-price factors shift the entire curve.
Graphical representation of price-quantity relationships keeps the supply schedule static when non-price parameters do not change.
3
Determine the direction of the movement along the curve
Since price increased, producers supply a larger quantity, resulting in an upward movement along the positive-sloped supply curve (an expansion of quantity supplied).
Higher market prices provide higher revenue incentives, motivating firms to increase output along their current cost and supply structure.

Key Concept

Law of Supply and Movement Along the Supply Curve
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Topics

Concept and Law of Supply

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