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CA Foundation · Business Economics · Theory of Demand and Supply

When the price of coffee rises significantly, the quantity supplied by farmers increases, but the increase is smaller in the short run than in the long run. Which concept best explains this difference in supply response?

Time period determines supply responsiveness to price changes. Short-run supply is constrained by fixed inputs and existing capacity, whereas long-run supply can adjust more fully as farmers plant new areas and invest in production capacity.

  1. AIncome effect and substitution effect
  2. BNormal goods versus inferior goods
  3. CTime period and the nature of supply constraintsCorrect
  4. DCross-price elasticity of supply

Explanation

Supply's responsiveness to price changes depends on the time horizon. In the short run, farmers cannot easily expand cultivation due to fixed land and labour constraints. In the long run, they can adjust inputs fully (plant new crops, invest in irrigation, hire workers). This is the core of the supply curve's upward slope over different time horizons. Options 0 and 1 relate to demand, not supply variation. Option 3 measures cross-commodity effects, not time-based supply responses.

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