Question

9. When the demand for toilet paper increases, the equilibrium quantity sold increases. Consumers are buying more, and producers are producing more a. How do producers receive the signal that they need to increase production to meet the new demand? b. Based on the facts given above, can you say that an increase in the demand for toilet paper causes an increase in the supply of toilet paper? Carefully explain why or why not

Answer 1

. a. Producers independently decide how much to produce of their products given the price at which they expect to be able to sell them, and consumers show up at stores to buy the good. Sometimes producers might supply too little in the short run, but through the market, these mistakes tend to be corrected.

The signals producers receive are price signals since shortages or surpluses in the market tend to put upward or downward pressure on the market price of a good.

b. In this scenario, the increase in demand leads to increased production reflects an increase in the quantity supplied, not in supply.

An increase in the demand for toilet paper will shift out the demand curve, which will increase the price of toilet paper and hence the quantity supplied via a movement along the supply curve not the supply of toilet papers because the supply curve of toilet paper does not shift due to increase in the demand.