Exercise Set 4
THE SUPPLY CURVE

I. Objectives

• To sketch the supply curve.
• To understand the meaning of ceteris paribus.
• To distinguish between a movement along the curve and a shift of the curve.

II. Data

• The supply of tea is described by Q = a + bP, where a and b are parameters, P is the price in $/ton and Q is the quantity supplied (in tons).
• Select values for the parameters a and b.
• Select the market price of tea.
• Click on Gimme Q! to obtain quantity supplied by tea producers.
  
  

  a =

  b =

  Price =

  Quantity supplied =

III. Questions

1. Explain why the parameter b is likely to be positive.
   
   
2. Select values of the parameters: a = -20, b = 0.5.
   1. Rewrite the equation with P as a function of Q, i.e. with P on the LHS of the equation.
   2. Sketch the supply curve with P on the vertical axis. Indicate its slope and intercepts.
   3. Suppose a goes from -20 to -15. What development in the tea market might have caused this to happen?
      [Hint: The change in a from -20 to -15 is equivalent to a rise in supply.]
   4. Sketch the new supply curve for a = -15.
      
      
3. Suppose a = -10 and b = 1.5, and the market price of tea rises from from $50/ton to $60/ton. Consider the statement: "The increase in price from $50/ton to $60/ton will cause supply to fall from 100 to 85 tons, ceteris paribus".
   1. What are the various things wrong with the statement?
   2. Write a corrected statement.

IV. Additional questions

1. If supply falls, which of the following will occur?
   1. The supply curve will shift to the left.
   2. The supply curve will shift to the right.
   3. There will be an upward movement along the curve.
   4. There will be a movement along the curve downwards.

2. An increase in the supply of corn will be caused by which of the following?
   1. The price of fertilizers increases.
   2. The demand for corn rises.
   3. Consumers' incomes go up.
   4. Farmers begin using better seeds.

3. When drawing a supply curve, the variables that are held fixed are
   1. The price of the good
   2. Consumers' incomes
   3. Prices of inputs
   4. Both a and b
   5. Both b and c

4. A movement along the supply curve for a good will be caused by
   1. A change in the prices of inputs
   2. A change in technology
   3. A change in the price of the good
   4. Both a and b
   5. All of the above

5. A shift in the supply curve may be caused by a change in
   1. The price of the good
   2. Consumers' preferences
   3. Income
   4. Technology
   5. Both a and b

	1a 2d 3c 4c 5d