The correct option is 1, 2 and 3.
Explanation
The market supply of a good is determined by various factors, including the price of the good itself and the cost of factors of production (inputs). Changes in input prices affect the cost structure of firms, specifically the marginal cost, which directly influences the position of the supply curve.
Statement-wise Analysis:
- Statement 1 is Correct: Marginal Cost (MC) is the cost incurred to produce one additional unit of a good. Since production requires inputs (labor, raw materials, capital), an increase in the price of these inputs raises the cost of producing every additional unit. Consequently, the marginal cost curve shifts upward.
- Statement 2 is Correct: The supply curve represents the relationship between the price of a good and the quantity supplied, holding other factors constant. When input prices rise, production becomes more expensive. Producers are willing to supply less at any given price, or they require a higher price to supply the same quantity. This decrease in supply is represented graphically by a leftward shift of the supply curve.
- Statement 3 is Correct: Market equilibrium occurs where the supply and demand curves intersect. If the supply curve shifts to the left (decrease in supply) while the demand curve remains constant, the new intersection point will be at a higher price level and a lower quantity level. This results in an increase in the equilibrium price and a decrease in the equilibrium quantity.
Key Takeaway:
An increase in input costs acts as a negative supply shock. It raises the marginal cost of production, shifts the supply curve to the left, and results in a higher market price and lower quantity traded, assuming demand remains unchanged.