Question

In 2020 the United States will use some $10 trillion of manufactured goods as measured by the price level as it will be in 2020—producing $9 trillion and paying for the extra $1 trillion by exporting services. Let’s use that as our unit of the quantity of manufactures—$1 worth at 2020 prices is equal to one unit of manufactured goods. And let’s set our index of the price of manufactured goods in 2000 equal to 1.

Suppose the supply curve for manufactured goods has constant-returns-to-scale, with no producer having (much of) an opportunity cost advantage over any other.

Suppose the demand curve for manufactured goods is a straight line linear function such that an increase in the price from its 2000 value of 1 to a value of 2 would lead to a reduction in the quantity demanded by $1 trillion.

What will be the equilibrium price of manufactures in 2020?

Answer 1

Rate is what you pay for whatever and rate is what you incur in producing anything. That clarification was wanted to make the question meaningful. The query then is If the fee of creation of anything increases, what happens to the demand/supply of the item? this is an additional question from If the rate of whatever increases, what happens to the demand/supply of that factor?

We ought to preserve in mind the connection between the fee and price of some thing. If the cost of production is excessive, then the fee (if the price exists) is high. If the rate is low, then the fee is low (in aggressive markets).

So then, if the cost of construction goes up, then the supplier will provide only if the market fee is bigger than the fee. Assume if widget creation bills go as much as $10 per widget for a detailed producer, however the prevailing market fee of widgets is $9 per widget. If so, the producer won't supply to that market. If the market price per widget goes over $10, then that producer will provide widgets to the market.

Most often, when the rate of construction goes up for all producers (now not only one distinct producer) but the market rate does now not go up, it implies that larger fee producers will exit the market because of this the supply time table will shift inward. That in turn means that even supposing the demand schedule stays unchanged, the market cost will go up, and the range demanded will go down.

(We have got to note that there's a distinction between trade in the quantity demanded and change in demand. the previous is a transformation in quantity that is demanded at a unique rate even as the latter is a change within the relationship between price and quantity.)