Theory Of Supply - CA Foundation Business Economics Free MCQ Test

Price Elasticity of Supply (E_s) = (% Change in Quantity Supplied) / (% Change in Price)

1. Calculate the percentage change in quantity supplied:
   Initial quantity supplied = 240 kg
   New quantity supplied = 300 kg
   Change in quantity supplied = 300 - 240 = 60 kg
   Percentage change in quantity supplied = (60 / 240) × 100 = 25%
2. Calculate the percentage change in price:
   Initial price = Rs. 30 per kg
   New price = Rs. 40 per kg
   Change in price = 40 - 30 = Rs. 10
   Percentage change in price = (10 / 30) × 100 = 33.33%
3. Calculate the elasticity of supply:
   E_s = 25% / 33.33% ≈ 0.75

The elasticity of supply is 0.75.

The correct answer is option (A): True
Explanation:
Supply refers to the quantity of a product or service that producers are willing and able to sell at a particular price during a specific period of time.

To explain in detail:

1. Quantity supplied: This is the amount of a product or service that businesses are willing to sell at a given price level. It can be influenced by various factors, such as production costs, competition, and overall market conditions.

2. Price level: The price level is the specific price at which producers are willing to sell their products or services. As prices increase, businesses are generally more motivated to supply greater quantities of their goods or services because they can potentially earn higher profits. Conversely, as prices decrease, the quantity supplied generally decreases as well.

3. Time period: The supply of a product or service can vary over time. For example, seasonal products like holiday decorations may have a higher supply during certain times of the year. Similarly, supply can change due to external factors such as technological advancements, changes in consumer preferences, or shifts in the economy.

4. Law of Supply: The law of supply states that the quantity supplied of a good or service is directly related to its price. This means that as the price of a good or service increases, the quantity supplied will also increase, and vice versa. This relationship is typically represented by an upward-sloping supply curve on a graph.

In conclusion, supply refers to the quantity of a product or service that producers are willing and able to sell at a particular price during a specific period of time. It is an essential concept in understanding the dynamics of market economies and the forces that drive changes in the availability of goods and services.

The correct answer is option (A)
When the supply price increases in the short run, the profit of the producer increases.

Explanation:

Increased Revenue:
- When the price of a product or service increases, it directly leads to an increase in the revenue generated from the sale of that product or service.
- Assuming that the quantity sold remains constant or does not decrease significantly, the increase in price will lead to higher total revenue for the producer.

In conclusion, when the supply price increases in the short run, the profit of the producer typically increases due to higher revenue and potentially stable or only marginally increasing costs.

The correct answer is option (D)
Explanation:

The supply of goods refers to the amount of goods offered for sale at a particular price per unit of time. This concept is essential in understanding the dynamics of the market and is a key component of supply and demand analysis.

The correct answer is (C) Unitary elastic supply.

Explanation:

Unitary Elastic Supply:
- Unitary elastic supply occurs when the percentage change in quantity supplied is equal to the percentage change in price.
- In this case, the price elasticity of supply (PES) is equal to 1.
- PES is calculated as the percentage change in quantity supplied divided by the percentage change in price.
- Unitary elastic supply reflects a situation where producers are able to adjust their production levels proportionately to the changes in price.
- This type of supply response is more likely to be observed in markets where producers have some flexibility in adjusting their production levels but are not able to do so instantaneously or without constraints.
 

Correct answer is option A.

An increase or decrease in supply means a shift in the supply curve. 

Explanation:
Shift in the supply curve:
- A shift in the supply curve occurs when there is a change in the overall quantity of goods or services that suppliers are willing to produce at various price levels.
- This shift can be caused by various factors, including changes in production costs, advancements in technology, or changes in the number of suppliers in the market.
- An increase in supply means that the supply curve shifts to the right, indicating that suppliers are willing to produce more goods or services at each price level. This may result from lower production costs or advancements in technology that enable more efficient production.
- A decrease in supply means that the supply curve shifts to the left, indicating that suppliers are willing to produce fewer goods or services at each price level. This may result from higher production costs or other factors that make production less efficient.

Movement along the same supply curve:
- A movement along the same supply curve occurs when there is a change in the price of a good or service, but the overall supply curve remains unchanged.
- In this case, suppliers may be willing to produce more or fewer goods or services in response to changes in price, but the overall relationship between price and quantity supplied remains the same.
- This movement does not represent an increase or decrease in supply; it simply shows the change in the quantity supplied at different price levels on the same supply curve.

In conclusion, an increase or decrease in supply refers to a shift in the supply curve, not a movement along the same supply curve. This shift indicates a change in the overall quantity of goods or services that suppliers are willing to produce at various price levels, which can be caused by various factors such as changes in production costs, advancements in technology, or changes in the number of suppliers in the market.

The correct answer is  Option A: Market price.
Explanation:
Market price is the price at which goods and services are offered in the market at a particular point of time.
It is the point at which the demand and supply forces meet. 
Hence, the price that comes to prevail in the very short period is called market price.

Correct answer is option B.

Explanation:

In this case, the elasticity of supply is equal to 0.
Perfectly Inelastic Supply:
- In the case of perfectly inelastic supply, the quantity supplied remains the same even when the price changes.
- This means that the percentage change in quantity supplied is 0, regardless of the percentage change in price.

Correct answer is option A.

Explanation:

A change in the supply of a commodity along the same supply curve may occur due to a change in the price of the commodity. Let's discuss this in detail:
Change in the price of the commodity:
- When the price of a commodity changes, it leads to a change in the quantity supplied of that commodity. This change in the quantity supplied happens along the same supply curve.
- The supply curve shows the relationship between the price of a commodity and the quantity supplied, assuming all other factors remain constant.
- If the price of the commodity increases, the quantity supplied will also increase, as producers are motivated to produce and supply more of the commodity at a higher price to earn more revenue. This movement is called an extension of supply and happens along the same supply curve.
- Conversely, if the price of the commodity decreases, the quantity supplied will decrease, as producers are less motivated to produce and supply the commodity at a lower price. This movement is called a contraction of supply and also occurs along the same supply curve.

Correct answer is option B.

Explanation:

The elasticity of supply is a measure of how the quantity supplied of a good responds to a change in its price. It is calculated using the following formula:

Elasticity of Supply = (% Change in Quantity Supplied) / (% Change in Price)

In this case, we are given:

- A 20% fall in price (which is a -20% change in price)
- A 10% fall in quantity supplied (which is a -10% change in quantity supplied)

Now, we can plug these values into the formula:

Elasticity of Supply = (-10%) / (-20%)

Elasticity of Supply = 0.5

So, the elasticity of supply in this case is 0.5. This means that for every 1% decrease in price, the quantity supplied will decrease by 0.5%. This indicates that the supply is inelastic, as the percentage change in quantity supplied is less than the percentage change in price.

Correct answer is option A.

Explanation:

Elasticity of supply is defined as responsiveness of quantity supplied of a good to change in Price of concerned good.

Let's discuss the concept in more detail:

- Price of concerned good: Elasticity of supply is directly related to the change in the price of the good in question. When the price of a good increases, suppliers are more willing to produce and supply more of that good, as it becomes more profitable for them. Conversely, when the price of a good decreases, suppliers are less willing to produce and supply that good, as it becomes less profitable.
 

The correct answer is (A): Vertical
Explanation:
Perfectly Inelastic Supply Curve:
- A perfectly inelastic supply curve is a supply curve where the quantity supplied does not change, regardless of any change in the market price.
- In this case, producers are not responsive to changes in price, meaning they will supply the same quantity of a good or service no matter what the price is.
- This can be a result of factors such as limited resources, production constraints, or a lack of viable substitutes.

Vertical Supply Curve:
- A perfectly inelastic supply curve is represented by a vertical line on a graph with the Y-axis representing price and the X-axis representing quantity.
- The reason it is vertical is because the quantity supplied remains constant, regardless of the price. This means that the line will not slope upwards or downwards, but remain straight up and down along the Y-axis

In summary, a perfectly inelastic supply curve is represented by a vertical line because the quantity supplied does not change in response to changes in price.

The correct answer is B:Change in price.
Explanation:
To explain in detail, let's first understand the concept of demand. Demand refers to the quantity of a good or service that consumers are willing and able to purchase at a given price level. A shift in demand refers to a change in the entire demand curve, which represents a change in the quantity demanded at all price levels.

Now, let's discuss the factors that cause a shift in demand:

1. Change in income: An increase in consumers' income generally leads to an increase in demand for goods and services, as people can afford to buy more. Conversely, a decrease in income leads to a decrease in demand.

2. Change in price: This factor does not cause a shift in demand. Instead, it causes a movement along the demand curve. When the price of a good or service increases, the quantity demanded decreases, and when the price decreases, the quantity demanded increases. This is known as the law of demand. A change in price does not shift the demand curve but causes a movement from one point to another on the same demand curve.

3. Change in fashion: As consumer preferences and tastes change, the demand for goods and services may also change. For example, if a particular clothing style becomes popular, the demand for that style will increase, causing a shift in the demand curve.

4. Change in prices of substitutes: Substitutes are goods that can replace each other in consumption. If the price of a substitute good increases, consumers may choose to buy the original good instead, which will increase the demand for the original good. On the other hand, if the price of a substitute decreases, consumers may switch to the substitute, causing a decrease in demand for the original good. This results in a shift in the demand curve.

In conclusion, changes in income, fashion, and prices of substitutes can cause shifts in demand, while a change in price results in a movement along the demand curve rather than a shift.

The correct answer is Option A : "An increase."
Explanation:

Shifts in the Supply Curve:
- A shift in the supply curve means that the entire curve moves either to the right or to the left.
- A rightward shift indicates an increase in supply, while a leftward shift indicates a decrease in supply.

To summarize, a rightward shift in the supply curve represents an increase in supply, as producers are willing to produce and sell a greater quantity of the good at any given price level. This increase in supply can lead to lower prices and a higher market equilibrium quantity for the good in question.

The correct answer is C: Increase in equilibrium quantity, equilibrium price remaining constant.
Explanation:
The impact of an increase in demand on a commodity with perfectly elastic supply:
1. Increase in Demand: When the demand for a commodity increases, the demand curve shifts to the right. This means that at the same price, consumers are now willing to buy more of the commodity.
2. Adjustment in Supply: Since the supply is perfectly elastic, producers are willing to supply any quantity demanded at the given price. As the demand increases, producers will increase the quantity supplied to match the new demand, without changing the price.
3. New Equilibrium: The new equilibrium will occur at the same price level as before the increase in demand, but with a higher quantity. This is because the perfectly elastic supply allows producers to adjust their supply without needing to change the price.

In summary, when the supply of a commodity is perfectly elastic, an increase in demand will result in:
- Increase in equilibrium quantity
- Equilibrium price remaining constant

The correct answer is Option B: Infinite

Explanation:
Elasticity of supply- refers to the responsiveness of the quantity supplied of a good to a change in its price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price.

A horizontal supply curve parallel to the quantity axis implies that the supply is perfectly elastic. In other words, suppliers are willing and able to supply any amount of the good at a constant price.

This situation leads to an infinite elasticity of supply because:
- The percentage change in price is zero (since the price remains constant).
- The percentage change in quantity supplied can be any positive value (as suppliers can produce any amount at the constant price).
- Elasticity of supply formula: % change in quantity supplied / % change in price
- When the denominator (% change in price) is zero, the elasticity of supply becomes infinite.

In summary, a horizontal supply curve parallel to the quantity axis implies that the elasticity of supply is infinite because suppliers can produce any amount of the good at a constant price, and the responsiveness of quantity supplied to a change in price is infinitely large.

The correct option is D.

Perfectly inelastic demand means that a consumer will buy a good or service regardless of the movement of price. In order for perfectly inelastic demand to exist, it has no close substitutes available.So when a demand for a good is completely unresponsive of the changes in price level this means it is not affected by whatever the price maybe so its perfectly inelastic.

The correct answer is Option A: Larger quantity of the commodity at an increased price.

Explanation:
Expansion in supply refers to a situation where producers are willing to supply a larger quantity of a commodity in response to an increase in its price. 
In summary, expansion in supply occurs when producers are willing to supply a larger quantity of a commodity at an increased price, driven by factors such as higher profit margins, improved production technology, economies of scale, favorable market conditions, and government policies.

The Law of Supply states that other things remaining constant, there is a direct relationship between price and quantity supplied. When the price increases, suppliers are willing to offer more goods for sale, and when the price decreases, supply contracts.

The law of supply works ceteris paribus (other things remaining the same). It assumes: no change in technology, cost of inputs, government policy, weather conditions, etc. Hence, factor costs must remain constant for the law to hold true.

A rightward shift of supply curve means an increase in supply at the same price. This happens when cost of production decreases due to better technology, subsidies, or fall in input prices. In contrast, increase in input prices, taxes, or calamities reduce supply (leftward shift).

The correct answer is B: Horizontal to X-axis.
Explanation:
Elasticity of demand refers to the degree to which the quantity demanded of a good or service changes in response to a change in its price. When the price remains constant and the quantity demanded changes, we are dealing with a case of  perfectly elastic demand.

In this scenario, the demand curve has the following characteristics:
- Horizontal to the X-axis: The demand curve is a horizontal straight line parallel to the X-axis. This means that even a small change in price would lead to an infinite change in quantity demanded.

Price Elasticity of Supply (Es) = % change in quantity supplied ÷ % change in price.

• Es > 1 → Supply is elastic (responsive to price).
• Es < 1 → Supply is inelastic.
• Es = 1 → Unitary elastic.
• Es = 0 → Perfectly inelastic.

The correct answer is B) Flow Concept.
Explanation:
Flow Concept
Supply of a commodity is considered a flow concept because it refers to the amount of a good or service that is available to be purchased or consumed over a specific period of time. In economics, the flow concept represents how resources, goods, or services are transferred or exchanged within an economy. Some key aspects of the flow concept include:
 

Supply depends on: price of the commodity, cost of production, technology, government policy, expectations, and prices of related goods. Income of consumers affects demand, not supply.

Correct answer is option C) 0.833

Explanation:

To calculate the elasticity of supply, we use the formula:
Elasticity of Supply (Es) = (Percentage change in quantity supplied) / (Percentage change in price)

First, we need to find the percentage change in quantity supplied and the percentage change in price.
Percentage change in quantity supplied = (New quantity supplied - Old quantity supplied) / Old quantity supplied
Percentage change in price = (New price - Old price) / Old price

Given the information in the question, the old price is Rs. 15 and the new price is Rs. 12. The old quantity supplied is 6 units and the new quantity supplied is 5 units.

Now, let's calculate the percentage change in quantity supplied and percentage change in price:

Percentage change in quantity supplied = (5 - 6) / 6 = -1 / 6 = -0.1667 (rounded to four decimal places)
Percentage change in price = (12 - 15) / 15 = -3 / 15 = -0.2 (rounded to two decimal places)

Now, we can calculate the elasticity of supply:

Elasticity of Supply (Es) = (-0.1667) / (-0.2) = 0.833 (rounded to three decimal places)

When the supply curve passes through the origin, the percentage change in quantity supplied = percentage change in price, hence Es = 1 (unitary elastic).

Correct answer is option B) 1.00
Explanation:

To find the elasticity of supply, we can use the formula:
Elasticity of Supply (E) = (% change in quantity supplied) / (% change in price)

First, let's calculate the percentage change in quantity supplied and the percentage change in price.
% change in quantity supplied = (change in quantity / original quantity) * 100
% change in quantity supplied = (12,000 - 10,000) / 10,000 * 100
% change in quantity supplied = 20%

% change in price = (change in price / original price) * 100
% change in price = (30 - 25) / 25 * 100
% change in price = 20%

Now, we can plug these values into the formula:

E = (20% / 20%)
E = 1.00

So, the elasticity of supply is 1.00, which means the supply is unitary elastic. The correct answer is:

1.00

In this case, the supply of the commodity responds proportionately to the change in price. A 20% increase in price results in a 20% increase in the quantity supplied.

When the supply curve originates from the origin, percentage change in price and quantity supplied are proportional, giving unitary elasticity (Es = 1).