Question
Explain how does change in price of input affect the supply of a good.
Solution
Increase in price of Input: Increase in price of input is cause of a decrease in the supply of a good because the production cost of a good will increase due to increase in price of input. It will reduce the profit. So producer will decrease the supply of the good.
Decrease in the price of input: Decrease in price of input is cause of increase in supply because when the price of input decreases, the production cost of a good also decreases. Decrease in cost increases the profit margin. It motivates producer to increase the supply of the good.
