How would an increase in the cost of producing a good affect the supply of the good?
The correct answer and explanation is:
An increase in the cost of producing a good would generally lead to a decrease in the supply of that good.
This happens because higher production costs make it less profitable for producers to make the same amount of the good at the previous price. As a result, producers may cut back on production or reduce the quantity they are willing to supply at any given price. In other words, as the cost of inputs (like raw materials, labor, or energy) rises, it becomes more expensive to produce each unit, and firms may respond by either producing less or raising the price of the product to maintain their profit margins.
When producers face higher production costs, they might need to either increase the price they charge consumers to cover the higher expenses or reduce the quantity they produce. This relationship is captured by the law of supply, which suggests that, all else being equal, a decrease in the supply of a good will occur when the cost of production rises.
In a competitive market, producers that cannot afford the higher production costs may be forced out of the market, which further decreases the overall supply. This contraction in supply can lead to higher market prices, assuming demand remains unchanged.
On the other hand, if producers can find ways to offset the increased costs (for example, by improving efficiency or using cheaper inputs), the negative impact on supply may be less pronounced. However, in general, increased production costs push the supply curve to the left, representing a decrease in supply. This decrease in supply will likely cause the equilibrium price to rise while the equilibrium quantity falls, depending on the price elasticity of demand for the good.