In: Economics
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 – 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.
The result is a rise in the price of minivans from P0 to P1 and a decline in the quantity from Q0 to Q1.
The result is reduction in the price of minivans from P0 to P1 and increase in quantity supplied from Q0 to Q1.