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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

A cement manufacturer in Rajasthan finds that, with its plant and kiln capacity fixed, it will supply 40,000 tonnes a month at ₹5,000 per tonne and 48,000 tonnes at ₹5,400 per tonne. Which statement about this behaviour is consistent with the law of supply?

The data show quantity supplied rising when price rises with other factors constant, which is exactly the law of supply and implies an upward-sloping supply curve. It is a movement along the curve, not a shift, and does not imply perfect elasticity or monopoly power.

  1. AQuantity supplied rises as price rises, other things being equal, so the supply curve slopes upwardCorrect
  2. BQuantity supplied rises as price rises because the demand curve has shifted outward
  3. CQuantity supplied rises as price rises because input costs have fallen, shifting the supply curve right
  4. DQuantity supplied rises as price rises, which shows that supply is perfectly elastic
  5. Quantity supplied rises as price rises, which can only happen if the firm is a monopolist

Explanation

The law of supply says that, ceteris paribus, a higher price leads to a larger quantity supplied, giving an upward-sloping curve. The change here is a movement along the curve caused by price. It is not a shift from costs or demand, and the data say nothing about perfect elasticity or market structure.

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