Question

4. Shifting curves and the importance of elasticity Consider the market for umbrellas. Suppose the quantity of umbrellas demanded by consumers (D) depends on the price of an umbrella (P) and the percentage chance of rain (R) forecasted by the local news station. Similarly, the quantity of umbrellas supplied by producers (Qs) depends on the price of an umbrella (P) and the square-foot price of waterproof nylon (N) used in the production of umbrellas. The following two graphs depict the market for umbrellas in two separate regions. Suppose the price of waterproof nylon increases to $3 per square foot in both regions. On each of the graphs, show the effect this has on the market for umbrellas by shifting the demand curve, the supply curve, or both. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.

Answer 1

Since the supply of umbrella depends on the price of waterproof nylon and not the demand , therefore only the supply curve will shift because of increase in its price. And since waterproof nylon is an input for umbrella production, Increase in its cost will Increase the cost of production of umbrella and therefore decrease its supply. The supply curve of umbrella will therefore shift to the left.

In both markets, this change in the price of waterproof nylon causes the equilibrium quantity to decrease and the equilibrium price to increase.

​​​​​​You can see that although the affected. Curve ahifted by the same amount in both markets, the effect on the equilibrium quantity is smaller in the market with more steep demand.

The first image above has a steeper demand curve than the second. Steeper demand curve implies an inelastic demand. Therefore a shift of the supply curve will not affect the equilibrium quantity to that extent as it does in the market with flat / elastic demand curve. Hence the price. Increase is greater in the inelastic market and quantity decrease is smaller.

( Because the market is inelastic the quantity doesn't change much, but the cost of production has increased which has made the umbrella production costly. This means the producer has to increase the price to be able to produce the quantity demanded at an economic rate)

The shift of the supply curve is shown in red.

PT dd