Question

Which of the following is the reason for a decrease in supply?

• A. Increase in production cost
• B. Increase in the prices of substitutes
• C. Fall in number of firms in the industry
• D. All of these

Hint:

A decrease in supply is caused by factors that make production less profitable or reduce the number of producers. Think of it as anything that shifts the supply curve to the left.

Answer 1

The Correct Option is D

A decrease in supply refers to a leftward shift of the supply curve, meaning that at any given price, producers are willing and able to sell less than before. This can be caused by several factors:

(A) Increase in production cost: If the cost of inputs like labor, raw materials, or energy rises, production becomes less profitable, leading firms to reduce supply.
(B) Increase in the prices of substitutes (in production): If a farmer can grow wheat or corn, and the price of corn increases, they may switch from growing wheat to growing more corn. This decreases the supply of wheat.
(C) Fall in number of firms in the industry: If firms exit the market, the total quantity of the good supplied at each price will naturally decrease.
All the options listed are valid reasons for a decrease in supply.