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

A textile mill in Surat adopts a new weaving technology that lowers its cost of producing each metre of cloth. Other things remaining the same, what is the most likely effect on the supply of cloth?

The supply curve shifts to the right. Better technology lowers the cost of producing each unit, so producers can profitably offer more cloth at every price. Because the cause is a non-price factor rather than a change in the cloth's own price, it is a shift, not a movement along the curve.

  1. AThe supply curve shifts to the right, so more cloth is offered at every priceCorrect
  2. BThe supply curve shifts to the left, so less cloth is offered at every price
  3. CThere is a movement up along the existing supply curve
  4. DThere is a movement down along the existing supply curve

Explanation

Improved technology reduces unit cost, making production more profitable at each price. Firms are therefore willing to offer more at every price, so the supply curve shifts right. Movements along the curve occur only when the product's own price changes, which has not happened here.

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