Supply of a product will increase as the determinants of supply changed. One of the determinants is cost of production. Cost of production is amount of money or assets used to produced a good. When it decreases, the supply of the good will increase. This is because producers are willing to produce more as the cost of production is lower.

For example, Mr Wong is a vase producer. He usually produces 30 vases per month. Unfortunately, the price of raw material which is used to produce vases has decreased. At the same time, cost of production increases. Hence, Mr Wong, as a producer willing to produce more under lower cost of production, but to earn more profit than before.

Besides that, the improvement of technology can cause the supply of a product increases. Nowadays, technology is improving and able to invent machine or use lesser time and resources to increase the productivity of a product. Thus, a large amount of product can be produced during a short period of time, so the supply will increase.

For illustration, nowadays technology enable to raise the productivity of vehicles as machines are invented. Therefore, lesser time is used during the producing process. However, more products have been produced. Supply of a product is therefore increased.

Finally, the expectation of producer will cause the supply of a product to increase. When a producer expect the price of a product will increase in the future, the producer will take the opportunity to increase the supply of the product in order to earn more profit when the expected price actually increased.

For instance, the price of salt is expected to raise in the future. Producers will produce more now in order to get additional profit in the future. Hence, supply of a product increases.

PART B

Rationing function of price is the capability of the competitive forces of supply and demand to a price at which selling and buying decisions are constant. It occurs to ensure that no surplus or shortage appeared in market. While resource allocation is how the resources are fully used while producing a product to maximise the profit but minimise the cost of production at the same time.

Price floors is the minimum price above the equilibrium price which set by the government. The objective of setting price floors by the government is to protect only the producer but also the consumer. Producers will receive the minimum income while the poor or average consumers is affordable to buy the product. However, if the price floors is too low, shortage will happen at that particular of time. Houses is one of the good examples. If the price floors set by the government is too low, many consumers tend to buy more but the producers are not willing to produce more because the price is low. In this situation, quantity demand exceeds quantity supply, therefore shortage occurred. Moreover, producers will allocate more resources on other more valuable product instead of building a house. Hence, the resources are not allocating in a balance and proper way. Finally, it causes inefficiency in resources allocation. Perhaps some resources will be wasted.