Question

A. If a meat firm increases it's workers pay, how will this affect the meat industry in the short run? Draw a graph with price and quantity

B. How will this affect individual meat manufacturers in the short run? What happens to their price and equilibirum quantity?

C. If the workers' pay goes back to what it was before the increase, what will happen to long run consumption of meat in the economy and meat production per firm compared to the short run?

Answer 1

A. When the meat firm industry increases the workers wages then, the firm owners will have to hire less workers to produce the smme quantity of meat in the industry. As the Labour is less hired then there will be an increase in the unemployment. So, due to less labour the output produced will decrease and so will the supply. This will lead to a rise in the price. As price of the meat increases the quantity demanded for meat by the consumers will fall.

The price goes up from P₀ to P₁. The uantity falls from Q₀ to Q₁. There is a shift in the demand curve to its left from D₀ to D₁, indicating a fall in the quantity demanded for meat. The supply also falls from S₀ to S₁ to its left, as there is a decrease in the production. The new equilibrium is E₁.

B. The individual meat manufacturers will produce less in order to cope with the increase in the wages given to the workers. They will try to decrease the price in order to increase the demand which will in turn increase the profit. The supply curve will shift right and demand will fall less as compare to that in the above diagram. The only difference is that here the price will decrease instead of increase in order to increase the quantity demanded.

C. If the wages for workers go back to normal, then the long run consumption of meat will increase since, now the wages have decreased, the producers will increase the meat production and reduce the prices in order to increase the demand by the consumers.