Question

Suppose autoworkers receive a substantial wage increase. Other things being equal, the price of autos will rise because of a (an) a. increase in the demand for autos. b. rightward shift of the supply curve for autos. c. leftward shift of the supply curve for autos. d. reduction in the demand for autos.

Short answer

The correct answer is (c) because a substantial wage increase for autoworkers results in higher production costs for auto manufacturers, which may cause them to reduce the number of autos supplied at the same price. This leads to a leftward shift of the supply curve for autos, resulting in an increase in auto prices.

Step-by-step solution

Understand the concept of supply and demand curves

To understand the effect of wage increase on the price of autos, let's revise the concept of supply and demand curves. The demand curve represents the quantity of goods buyers are willing to purchase at various price levels, while the supply curve represents the quantity of goods sellers are willing to sell at various price levels. A shift in either curve can affect the price of a good.

Analyze option (a): Increase in the demand for autos

An increase in the demand for autos means that buyers are more willing to purchase autos at the same price. However, a wage increase for autoworkers doesn't necessarily result in an increase in demand for autos. So, option (a) is likely not correct.

Analyze option (b): Rightward shift of the supply curve for autos

A rightward shift of the supply curve indicates that suppliers are willing to produce more autos at the same price. However, an increase in wages for autoworkers would incur higher production costs for auto manufacturers, which may decrease their willingness to supply the same number of autos at the same price. Therefore, option (b) is also not correct.

Analyze option (c): Leftward shift of the supply curve for autos

A leftward shift of the supply curve indicates that suppliers are willing to produce fewer autos at the same price. An increase in wages for autoworkers would result in higher production costs for auto manufacturers. This may cause them to reduce the number of autos supplied at the same price, leading to an increase in auto prices. Thus, option (c) seems to be the correct answer.

Analyze option (d): Reduction in the demand for autos

A reduction in the demand for autos means that buyers are less willing to purchase autos at the same price. Like option (a), an increase in autoworkers' wages doesn't directly lead to this change in demand. So, option (d) is not correct. Based on the analysis, the correct answer is: c. Leftward shift of the supply curve for autos.

Key concepts

Wage Increase Impact

Understanding the impact of a wage increase on market dynamics is pivotal in grasping how economies operate. In the context of autoworkers receiving a substantial wage increase, the immediate effect is on the cost of production. Since labor is a critical component of manufacturing costs, higher wages mean that the car producers will now incur greater expenses to produce the same number of autos.

This does not incentivize producers to increase production. Quite the opposite, with higher costs, they might opt to produce fewer cars to maintain their profitability or mitigate losses. Consequently, the supply of autos is likely to decrease. The result is a decrease in the quantity of autos supplied at existing price levels, causing a leftward shift of the supply curve—this could lead to higher equilibrium prices for autos if the demand remains unchanged, implying that consumers may face higher price tags when looking to purchase a vehicle.

It's critical to note that the wage increase doesn't directly affect consumer demand for cars but operates through the supply side of the market. An important takeaway is that changes in production costs have ripple effects throughout the economy, influencing prices and potentially affecting the overall supply of goods.

Price Elasticity of Demand

The concept of price elasticity of demand is essential when considering how changes in price impact the quantity demanded of a good or service. It measures the responsiveness, or elasticity, of the quantity demanded to a change in price. When demand is elastic, a small change in price leads to a significant change in the quantity demanded. Conversely, with inelastic demand, the quantity demanded is relatively unresponsive to price changes.

For instance, if autos are a good with inelastic demand, an increase in wages, followed by a consequent rise in car prices due to the leftward supply curve shift, might not lead to a substantial decrease in the quantity of autos sold. This is because consumers still need cars for transportation, despite higher prices. On the other hand, if demand for autos is elastic, a rise in auto prices might lead to a large decrease in quantity sold, as consumers could delay purchases, use alternative transportation methods, or seek substitutes.

Understanding the price elasticity of demand helps businesses and policymakers predict and manage the effects of price changes on sales volumes and revenue. It is also a critical tool for assessing how much of the additional production cost — such as a wage increase — can be passed on to consumers.

Supply Curve Shift

A supply curve shift occurs when there's a change in the quantity of a product that a producer is willing to sell at a given price, other than a change in the price of the product itself. A rightward shift, indicating an increase in supply, might occur due to technological advancements or a decrease in production costs. A leftward shift signifies a decrease in supply and could result from factors such as increased production costs, including labor costs, or regulatory changes.

The impact of a leftward supply curve shift, like in the case of autoworkers' wage increase, can be thought of as a bottleneck effect. It reduces the flow of autos into the market, potentially driving up the price if demand remains the same. Such a shift is crucial for understanding market dynamics because it reflects changes in suppliers' behavior that stem from variations in their costs and operating environment.

When the supply curve shifts left, businesses must decide whether to absorb the increased costs, reduce their output, raise prices, or a combination of these strategies. The optimal decision often relies on understanding how consumers might respond, which loops back to the importance of the concept of price elasticity of demand.