Question

In a competitive market, what are the impacts on price, quantity, and the

outcomes for producers and consumers, of a shock to marginal cost that hits

one sector of suppliers? (Alternatively: consider a shock to the demand side,

or the imposition of a tax or subsidy.) How do these impacts depend upon the

size of the affected sector, and the properties of supply and demand?

Answer 1

Lets consider example of lithium as commodity. If demsnd for lithium lets say increases due to manufacturing of electrical vehicles then it simultaneously reduces demand for crude oil because diesel/petrol vehicles will be susbtituted with electric vehicles causing positive demand shock for electrical vehicles and hence price increases. However lithium is precious commodity and due to excessive minibg over years its current supply will decrease and causing positive demand shock and hence higher prices. Thus consumers will pay more prices to electrical vehicles and suppliers will have higher cost of manufacturing due to change in technology in market.

This highly affects and shrinks size of diesel or petrol backed vehicles and increasing size of electrical vehicles.

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