Due to a global supply chain disruption, the cost of solar panels—an essential input for EcoGizmo's solar-powered phone chargers—has increased. How does the law of supply suggest EcoGizmo should respond to this change in input costs?
A) Maintain the same price and quantity supplied to avoid losing customers.
B) Increase production to take advantage of economies of scale.
C) Reduce the quantity supplied, as higher input costs will reduce profitability at current prices.
D) Increase the price of the $40 phone chargers to cover the higher input costs, maintaining the same quantity supplied.
Answer (2)
EcoGizmo should respond to the increase in input costs by increasing the price of their solar-powered phone chargers to maintain profitability while potentially keeping the same quantity supplied. This aligns with the law of supply, which indicates that increased production costs typically require a price adjustment. Thus, option D is the most suitable response.
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Based on the law of supply, EcoGizmo should respond to the increased cost of solar panels, an essential input, by changing its supply strategy. The law of supply suggests that, all else being equal, a rise in input costs makes producing the good less profitable. As a result, the quantity of the good the company is willing to supply at the previous price generally decreases.
Thus, the most appropriate response to the increase in input costs would be:
C) Reduce the quantity supplied, as higher input costs will reduce profitability at current prices.
Here's why:
Increased Costs: When the costs of inputs rise, the cost of producing each unit of output also increases. This can reduce the profit margin of goods sold at the current price.
Supplier Behavior: Suppliers typically respond to higher input costs by reducing the amount they supply, as producing the same quantity becomes less cost-effective unless prices are adjusted.
Price Adjustment: While increasing the price is a possible response, as suggested in option D, it is not what the law of supply directly implies. Price adjustments are a strategy companies may use if they want to maintain profitability without reducing supply.
By reducing the quantity supplied, EcoGizmo could maintain profitability to some extent and wait until costs stabilize or other adjustments (like price changes) are feasible. This aligns with the basic principles of supply and demand in economics.
