Name: Muntasir Ahmmed
Matric Numper: AIU20092093
Tutorial 3
Question 1
Explain the law of supply by using the supply curve.
The law of supply is the microeconomic law that states that, all other factors being equal, as the
price of a good or service increases, the quantity of goods or services that suppliers offer will
increase, and vice versa.
The graph shows that as the Price of a Product is increasing, the Supply amount is also rising.
This is the basic law of supply.
Question 2
a) What cause an increase in market supply?
The law of supply states that there is a direct relationship between price and quantity supplied. In
other words, when the price increases the quantity supplied also increases. There are also other
causes that can increase the market supply. An increase in the number of producers will also
cause an increase in supply. However, changes in the cost of inputs, new technologies, taxes,
subsidies, and government regulation all affect the cost of production. In turn, these factors affect
how much firms are willing to supply at any given price.
b) What cause a decrease in market supply?
Factors that can cause a decrease in supply include higher production costs, producer
expectations, and events that disrupt supply. Higher production costs make supplying a product
less profitable, resulting in firms being less willing to supply the good. An event that reduces the
quantity supplied at each price shifts the supply curve to the left.
c) Distinguish between an increase in the quantity supplied and increase in supply.
Quantity supplied refers to the amount of the good businesses provide at a specific price. The
supply curve is an equation or line on a graph showing the different quantities provided at every
possible price. A change in quantity supplied is a movement along the supply curve in response
to a change in price. A change in supply is a shift of the entire supply curve in response to
something besides price.
Question 3
What happens to the airline industry’s market supply curve as a result of the following
events?
a) There is an increase in the price of oil;
An increase in the price of oil caused an increase in the cost of the airline industry or air travel.
The supply curve will move upward from left to right, which expresses the law of supply: As the
price of oil increases, the quantity supplied increases. Therefore, if there is an increase in the
price of oil, there will be movement along the supply curve.
b) Airline workers demand and receive a 20% increase in their wage;
It is known that a rise in the wage rate increases the costs of firms producing the commodity,
forcing them to raise their selling prices. As the price of the product rises consumers will buy
less of it and less output will be produced and sold. Increasing in airline workers wage will
increase the cost of airline industry. This will cause movement along the supply curve. A change
in the price of a good or service causes a change in the quantity supplied—a movement along the
supply curve.
c) Pratt & Whitney develops an airplane engine which is 50% more fuel-efficient;
Fuel is a cost of producing air travel or managing an airline industry. Therefore, a fuel-efficient
airplane engine will definitely lower the production cost of airline industry and affects supply.
Lower input prices will shift the supply curve to the right, causing movement along the original
demand curve to a new equilibrium.
d) U.S manufactures of airplanes are subsidized by the U.S. government.
There will be decrease in the costs of airline industry if it received subsidy by the U.S.
Government. The effect of a specific per unit subsidy is to shift the supply curve vertically
downwards by the amount of the subsidy. Effectively this is an increase in supply. Therefore, the
supply curve will shift to right.
Question 4
Many changes are affecting the market for oil. Predict how each of the following events will
affect the equilibrium price and quantity in the market for oil. In each case, state how the
event will affect the supply and demand diagram. Create a sketch of the diagram.
a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon.
More fuel efficient cars means there is less need for gasoline. This causes a leftward shift in the
demand curve for gasoline and thus oil. Since the demand curve is shifting down the supply
curve, the equilibrium price and quantity both fall.
b. The winter is exceptionally cold.
Whenever there is cold weather, there's a need for heating oil, and so this causes a rightward shift
in the demand curve. And we have demand going up and because demand is going to the right,
which is the opposite of question a. Therefore, the equilibrium price and the equilibrium quantity
both rise.
c. The economies of some major oil-using nations, like Japan, slow down.
Generally, when there's a recession in the economy, there's less output, and therefore there's less
of a need for input and so there's gonna be a decrease in the demand for oil, so demand is
decreasing. And so since the demand curve is shifting left or down, the equilibrium price, and the
equilibrium quantity well, both fall.
d. The price of solar energy falls dramatically.
We know that solar energy is a substitute for oil-based energy. If solar energy becomes cheaper,
the demand for oil will decrease. Therefore, here equilibrium price is decreasing and equilibrium
quantity is also decreasing.
