Question

Suppose labor unrest in the dockyards decreases the quantity of iron ore available to steel producers. Explain the effect of this event on the quantity of steel supplied and on the supply of steel. O A. The supply of steel increases. O B. The supply of steel decreases. O C. The quantity of steel supplied increases and the supply of steel also increases. D. The quantity of steel supplied decreases. O E. The quantity of steel supplied increases. Click to select your answer

Answer 1

Answer is b). The supply of steel decreases. This is because iron-ore is a resource input in steel production. Due to labor unrest in the dockyard, the quantity of iron ore as a resource input available to producers of steel decreases. As a result of this, the production and hence supply of steel also decreases. Since the availability of iron ore decreases, the price of iron ore to the producers of steel using iron-ore as an input increases and hence their production cost goes up. Since supply is inversely proportional to input price, the supply of steel falls. Since the supply of steel falls, the supply curve shifts upwards and new quantity supplied of steel falls compared to the initial equilibrium.