Question

Assume the market for coal is initially in equilibrium. For each of the case below, identify the effect on the supply curve on the coal. What is the new equilibrium price and quantity in the market for coal for each case? Explain the process of how to get to the new equilibrium.

a. The development of a new, lower cost mining technique.

b. An increase in wages paid to coal miners.

c. The imposition of a $2 per ton tax on coal.

d. A government ban on all imports of coal.

e. A new government regulation requiring air purifiers in all work areas.

Answer 1

a. A new low cost mining technique, decreases production cost. This allows for more to be supplied at any given price and so supply curve shifts right. Ceteris paribus, this will cause equilibrium price to decrease and equilibrium quantity to increase. A decrease in price increases quantity demanded along the demand curve and hence new equilibrium is reached.

b. An increase in wages means a higher input cost. This decreases supply at any given price and so supply curve shifts leftwards. This causes equilibrium price to increase and quantity to decrease. At new equilibrium price, quantity demanded will decreases and quantity demanded decreases along the demand curve and the new equilibrium is reached.

c. A tax imposition, decreases price recieved by sellers. So supply curve shifts leftwards. This increases equilibrium price and decreases quantity. As prices are higher, quantity demanded decreases and moves up along the demand curve and equilibrium is reached.

d. As imports are banned, there will higher domestic demand. This will lead to an increase in supply and it shifts to the right. This causes equilibrium price to fall and quantity to increase. At the same time due to fall in price, more quantity is demanded and hence quantity demanded moves along the demand curve to the new equilibrium.

e. The government regulation will require installation of air purifiers. This will be a cost on the side of the supplier. This will decrease supply and supply shifts leftwards. The equilbrium price will be higher while quantity would fall. For equilibrium to be reached, the higher prices will decrease quantity demanded along the demand curve and the new equilibrium is reached.

Though diagram is not require, for understanding I have given two diagrams. one shows decrease in supply and other an increase in supply. The arrows on the demand curve show equilibrium adjustment.