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True or False:  Assuming that natural gas is an important input in Firm X's production...

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lilylee | Student, College Freshman | Salutatorian

Posted June 24, 2013 at 10:25 PM via web

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True or False:  Assuming that natural gas is an important input in Firm X's production process, an increase in the availibilty of natural gas that lowers the price of natural gas, will result in a leftward shift of Firm X's supply curve.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 24, 2013 at 10:42 PM (Answer #1)

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This statement is false.  If the price of natural gas declines, the supply of Firm X’s product will actually increase.  An increase in supply is shown by a movement of the supply curve to the right, not to the left.

The supply curve shows the amount of a good or service that a firm is willing and able to sell at a given selling price.  One of the major determinants of supply is the price of making the good.  This makes sense because the less it costs to make the good, the more profit the firm will make by selling it at a given price.  When a firm can get more profit, it will tend to want to produce more.  Therefore, the supply of the good will increase.

In this case, Firm X’s costs are dropping.  Firm X no longer has to pay as much for the natural gas.  Therefore, it costs the firm less to produce its product.  When it costs less, the firm will be willing to produce more of the good at a given price.  This is an increase in supply and it is shown by a movement of the supply curve to the right.

This statement is false because it says the supply curve will move to the left when it will actually move to the right.

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