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CA Foundation · Business Economics · Theory of Demand and Supply

Which of the following correctly describes a 'contraction of supply' in economic terms?

Contraction of supply is a downward movement along the same supply curve caused by a fall in the good's own price. Shifts of the curve from changes in costs or technology are called increase or decrease in supply instead.

  1. AA leftward shift of the supply curve due to higher input costs
  2. BA downward movement along the same supply curve due to a fall in the good's own priceCorrect
  3. CA rightward shift of the supply curve due to improved technology
  4. DAn upward movement along the same supply curve due to a rise in the good's own price

Explanation

Contraction of supply means less quantity is supplied because the good's own price falls, other things constant. This is a downward movement along the same supply curve. Shifts of the curve due to costs or technology are called decrease or increase in supply, and an upward movement is an extension of supply.

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