Question

 

After several years of decline, the market for handmade acoustic guitars is making a comeback. These guitars are usually made in small workshops employing relatively few highly skilled luthiers. Assess the impact on the equilibrium price and quantity of handmade acoustic guitars as a result of each of the following events. In your answers indicate which curve(s) shift(s) and in which direction.

a. Environmentalists succeed in having the use of Brazilian rosewood banned in the United States, forcing luthiers to seek out alternative, more costly woods.

b. A foreign producer reengineers the guitar-making process and floods the market with identical guitars.

c. Music featuring handmade acoustic guitars makes a comeback as audiences tire of heavy metal and grunge music.

d. The country goes into a deep recession and the income of the average American falls sharply.

Answer 1

a) Environmentalists succeed in having Brazilian rosewood banned in United States forcing luthiers to use more costly woods. It will raise cost of production for luthiers and induce them to produce less of guitars. It shift aggregate supply curve of guitar to its left from AS to AS1 which will raise price of guitar from P to P1 and reduce quantity sold from Y to Y1.

b) If foreign producers reengineer guitar making process and floods the markets with identical guitar. If will reduce demand of handmade guitar which will shift aggregate demand curve to its left from AD to AD1 which will reduce the price from P to P1 and reduce output sold from Y to Y1.

c) As people of tiring heavy metal and grunge music, it will increase demand of handmade music and shift dmeand curve to its right from AD to AD1 which will raise price from P to P1 and output from Y to Y1.

d) As there is fall in consumers of guitars, there will be fall in aggregate demand of guitars which will shift demand curve to its left from AD to AD1 which will reduce price from P to P1 and output form Y to Y1.