Question

Explain how input prices are a determinant of supply of a good by a firm.

Answer 1

When there is a rise in input prices, there will be an increase in the cost of production which results in a decline in profit margin and the supply of the good.

When there is an increase in input prices, the supply curve S shifts leftwards from S to S₁. It leads to a fall in the supply of good from OQ₂ to OQ₁, where the price remains constant at
OP.