Skip to content

CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply

A rise in the price of wheat from ₹2,000 to ₹2,200 per quintal leads a farmer to increase supply from 50 to 60 quintals. If, separately, a government subsidy on fertilisers lets the farmer supply 70 quintals at the original ₹2,000 price, the subsidy effect is best described as:

The subsidy causes an increase in supply, shown by a rightward shift of the supply curve. At an unchanged price of ₹2,000 the farmer now supplies 70 instead of 50 quintals because production costs fell. Movement along the curve happens only when the good's own price changes.

  1. AAn extension of supply along the same curve
  2. BA contraction of supply along the same curve
  3. CAn increase in supply, shown by a rightward shift of the supply curveCorrect
  4. DA decrease in supply, shown by a leftward shift of the supply curve

Explanation

At the same price of ₹2,000, quantity supplied rises from 50 to 70 quintals because input cost fell through the subsidy. A non-price factor changing the quantity at a given price is an increase in supply, shown by a rightward shift. Extension refers only to a price-induced movement along the curve.

Did you get it right without looking?

One question tells you little. A timed set on Theory of Demand and Supply shows your real accuracy, how long you take and where you lose marks.

Practise Theory of Demand and SupplyFree diagnostic mock

More Theory of Demand and Supply questions