Question

Challenge Prices are up 8 percent at the local juice shop. Its raw materials are inexpensive and easy to find, and the labor is unskilled. Should the shop be able to raise quantity supplied more than 8 percent? Why?

Short answer

Yes, the shop should be able to increase supply more than 8% due to low and scalable costs.

Step-by-step solution

Understand the Relationship Between Price and Quantity Supplied

In microeconomics, the law of supply states that, all else being equal, an increase in price results in an increase in quantity supplied. This happens because higher prices can justify higher production costs and potentially higher profit margins.

Analyze Cost Structure of the Juice Shop

The cost of production for the juice shop is influenced primarily by raw materials and labor. Since the raw materials are inexpensive and easy to find, the cost of production remains relatively low and stable. Labor is also unskilled, indicating it is relatively inexpensive and perhaps more easily scalable.

Assess the Ability to Increase Supply

Given the low and easily accessible cost structure, the shop has the capacity to increase production without facing significant cost barriers. Since the factors raising costs such as expensive raw materials or skilled labor are absent, the shop has a flexible supply curve and can increase production.

Conclusion Based on Supply Elasticity

Since the input factors—raw materials and labor—are easily scalable and inexpensive, the shop should be able to increase its quantity supplied by more than the percentage increase in prices, assuming there are no other market constraints.

Key concepts

Microeconomics

Microeconomics focuses on the behavior of individual agents within the economy, such as businesses and consumers. It examines how these agents interact with the markets to make decisions about the allocation of resources. In this context, we delve into the law of supply, which is a fundamental principle in microeconomics. This law posits that, assuming all other factors remain constant, the quantity supplied of a good rises as the market price increases.

When prices increase, producers are incentivized to supply more, as higher prices can cover additional production costs and yield higher profits. This principle is crucial in understanding how markets operate on a small scale, applying directly to the juice shop scenario presented in our exercise. As prices for juice have gone up 8%, the shop may find it attractive to supply more to capitalize on potential profits, aligning with the behavior predicted by the law of supply.

Cost Structure

A business's cost structure is an essential aspect of its operations, encompassing all the fixed and variable costs associated with producing a good or providing a service. In the case of the local juice shop, the main components of its cost structure are raw materials and labor. Analyzing these costs, we find that both are relatively inexpensive and readily available.

**Key Points on Cost Structure:**

• **Raw Materials:** Generally cheap and easy to source, stabilizing the cost involved in production.
• **Labor:** Unskilled and thus not demanding high wages, adding to the flexibility in scaling up production.

Because of this minimal cost barrier, the shop can significantly increase its output without substantial incremental expenses. This advantage allows the shop to adjust its supply in accordance with the price increase, fulfilling the potential for higher income without a sharp rise in total costs.

Supply Elasticity

Supply elasticity refers to the degree to which the quantity supplied of a good changes in response to a change in price. Elasticity measures the responsiveness of producers to price shifts. A product with high supply elasticity can quickly increase production when prices rise, due to ease in adjusting production factors.

In our juice shop scenario, the inexpensive and scalable aspects of both labor and raw materials underpin a high supply elasticity. Because these inputs can be readily increased without significant cost increments, the shop can augment its supply more than proportionately to the price hike of 8%.

• An elastic supply ensures that increased demand can be met with minimal delay or increased costs.
• The juice shop's conditions—easy-to-acquire raw materials and flexible labor—support a responsive supply structure.

Thus, enhancing its ability to leverage the market situation, enabling it to expand supply in excess of an 8% price increase is very feasible.