A technological advancement in tire manufacturing methods. Because of technological developments, the use of fewer resources at a lower manufacturing cost leads to increasing supply (McConnell et al., 2012).
A decrease in the number of companies in the industry.
The absence of a few enterprises from the industry is sure to reduce the supply of auto tires.
An increase in the price of rubber, which is utilized in the manufacture of tires.
Increasing rubber prices raise the entire cost of production, reducing supply. The expectation that the equilibrium price of auto tires will be lower in the future than currently.A speculated plunge in the equilibrium price of auto tires causes an increase in the current supply of auto tires.
A decline in the price of the large tires used for semi-trucks and earth-hauling rigs (with no change in the price of auto tires).Decreasing prices of large tires used for earth-hauling rigs and semi-trucks is likely to increase the supply of auto tires which would be more profitable.
The levying of a per-unit tax on each auto tire produced.Per-unit taxation, just like the rising cost of rubber, increases the cost of production and this discourages mass production thus it decreases supply.
The granting of a 50-cent-per-unit subsidy for each auto tire produced.Unlike taxes, government grants shift the cost of production downwards which leads to increased supply.
In 2001 an outbreak of hoof-and-mouth disease in Europe led to the burning of millions of cattle carcasses. What impact do you think this had on the supply of cattle hides, hide prices, the supply of leather goods, and the price of leather good?With millions of cattle carcasses burnt, there was a decrease in the supply of hide which, of course, pushed the prices of hide upwards because of the shortage created. This scarcity also means that fewer leather goods were going to be supplied at higher prices.
Critically evaluate: “In comparing the two equilibrium positions in Figure 3.7a, I note that a larger amount is actually demanded at a higher price. This refutes the law of demand.”
Figure 1. Peculiar Equilibrium shift “Figure 3.7a” (McConnell et al., 2012)Although the fundamental law of demand implies an inverse relationship between price and demand, the unusual upward shift of the equilibrium (congruence in price and demand increase) as shown in Figure 1 (3.7a) can only be possible when customers expect a future rise in prices, the number of buyers increases, there is a change in taste or preference, there is an increase in income (for normal goods), or there is a price change in related goods (McConnell et al., 2012).
Suppose the total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as shown in the table below. Suppose that the government establishes a price ceiling of $3.70 for wheat. What might prompt the government to establish this price ceiling? Explain carefully the main effects. Demonstrate your answer graphically. Next, suppose that the government establishes a price floor of $4.60 for wheat. What will be the main effects of this price floor? Demonstrate your answer graphically.
Thousands Bushels Demanded
Price per Bushel
Thousands of Bushels Supplied
85
$3.40
72
80
3.70
73
75
4.00
75
70
4.30
77
65
4.60
79
60
4.90
81
The table above shows that the equilibrium price is at $4.00 because the corresponding quantity demanded and the quantity supplied match at 75, 000 bushels. Therefore, a shortage of 7, 000 bushels is created when the government places the price ceiling at $3.70 since only 73, 000 bushels are supplied at this price while buyers demand 80, 000 bushels. Governments introduce price ceilings to protect consumers by capping prices at reasonably lower levels that ensure buyers can afford certain goods that would otherwise be unaffordable at the equilibrium price; and to discourage more production or consumption through the growing shortage. The graph below describes this relationship in details.
Conversely, by placing the price floor of wheat slightly above the equilibrium price at $4.70, the government automatically creates an excess of 14, 000 bushels because the consumer demands only 65, 000 bushels, but the supplier wishes to sell 79, 000 bushels at this price. Governments impose specified price minimums as an incentive to protect high-cost resource providers from excessive losses that may lead to closure or industry migration, especially in a free market (McConnell, Brue, & Flynn 2012). The graph below illustrates this relationship in details.
References
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2012). Microeconomics: brief edition (2nd ed.). New York: McGraw-Hill.
