Question

Consider the market for minivans. For each of the events listed below:

→ identify which of the determinants of supply are affected

→ indicate whether supply increases or decreases

→ draw a diagram to show the effect on the supply curve. (Make sure to label the axes.)

a. (0.5 pt) A strike by steelworkers raises steel prices.

b. (0.5 pt) Engineers develop new automated machinery for the production of minivans

Please draw the graph as well

Answer 1

Answer – According to the law of supply, price and the quantity supplied of a product are positively related. This means that higher the price of the product, greater the quantity supplied. Supply for a product refers to the quantity that producers are willing to sell at that price. Since quantity supplied and price of the good is positively related, the supply curve is upward rising.

Difference between quantity supplied and supply for a product

A change in price of the product causes the quantity supplied to change, not the supply for the good. Supply changes when factors except price changes. These factors include cost of production (change in input prices), change in technology, natural conditions or change in government policies.

When quantity supplied changes due to change in price, the movement takes place along the supply curve, but does not shift the supply curve.

However, when supply changes for factors except price, the supply curve shifts to the right or left.

Now let us consider the following two events for the minivans market.

1. A strike by steelworkers raises steel prices - If a strike by steelworkers increases steel prices, the costs of producing a minivan rise because there is a rise in steel prices, which is an important ingredient to produce minivan. So, the producers of minivan would be making less profit per minivan sold, which gives them less incentive to produce minivans and hence the supply of minivans decreases. As a result, the supply curve shifts from S0 to S1. Demand would not be affected and the demand curve, D would remain unchanged. The effect of the shift in supply curve has been illustrated in the following graph:

The result is a rise in the price of minivans from P0 to P1 and a decline in the quantity from Q0 to Q1.

2. Engineers develop new automated machinery for the production of minivans – Improvement of technology in the form of new automated machinery would increase supply because the cost of production decreases, which gives incentive to the producers to produce more. The reduction in production costs shifts the initial supply curve leftward from S0 to S1. Demand would not be affected as the demand curve, D would remain unchanged. The affect has been shown in the below graph.

The result is reduction in the price of minivans from P0 to P1 and increase in quantity supplied from Q0 to Q1.