Question

What effect will each of the following have on the supply of auto tires? \(L O 3.3.\) a. A technological advance in the methods of producing tires. b. A decline in the number of firms in the tire industry. c. An increase in the prices of rubber used in the production of tires. d. The expectation that the equilibrium price of auto tires will be lower in the future than currently. e. A decline in the price of the large tires used for semi trucks and earth- hauling rigs (with no change in the price of auto tires). f. The levying of a per-unit tax on each auto tire sold. g. The granting of a 50 -cent-per-unit subsidy for each auto tire produced.

Short answer

Technological advances increase supply; fewer firms, higher input costs, and taxes decrease supply; future price drops, subsidies increase supply; large tire price drops may not affect supply.

Step-by-step solution

Understanding Technological Advances

A technological advance typically makes production more efficient. For the tire industry, this means that firms can produce more tires at the same cost, or the same number of tires at a lower cost. This increase in efficiency will shift the supply curve to the right, indicating an increase in supply.

Impact of Decline in Number of Firms

A decline in the number of firms reduces the overall production capacity in the tire industry. With fewer manufacturers, the supply of auto tires is likely to decrease, shifting the supply curve to the left.

Effects of Increased Input Costs

When the cost of crucial inputs like rubber increases, production becomes more expensive. This increase in production cost makes it less profitable for firms to produce the same quantity of tires, leading to a decrease in supply. The supply curve shifts to the left.

Expectations of Lower Future Prices

If producers expect the price of auto tires to decrease in the future, they might attempt to sell more at the current higher price, temporarily increasing supply. However, once those lower prices are realized, supply might decrease. Initially, this expectation can shift the supply curve to the right.

Substitute Good Effect

A decline in the price of large tires for semi-trucks and earth-hauling rigs should not directly affect the supply of auto tires unless they are considered substitutes or if resources are reallocated. Generally, no change occurs in the supply of auto tires if these markets are independent.

Tax Impact on Supply

A per-unit tax on each auto tire sold increases the cost of selling each tire. With higher costs per unit, firms may supply fewer tires since the profit margin is reduced. Therefore, the supply curve will shift to the left, indicating a decrease in supply.

Subsidy Effect on Production

A subsidy lowers the effective cost for producing each tire. This incentive causes an increase in supply as it becomes more profitable to produce more tires. The supply curve shifts to the right as a result of the subsidy.

Key concepts

Effects of Technological Advances

Technological advances can revolutionize an industry by making production processes more efficient. When producers adopt new technology, they can produce more goods using the same resources, or produce the same amount with fewer resources. This kind of efficiency improvement in the tire industry means manufacturers can increase their tire output without raising their costs. When this happens, the supply of tires increases, shifting the supply curve to the right.

- Improved efficiency leads to reduced production costs. - More products can be made within the same time frame. - Overall, there's an increase in supply, often leading to lower consumer prices.

Thus, technological advances can make industries more competitive by lowering costs and increasing production capacity.

Input Costs and Supply

Input costs are crucial because they directly influence the overall cost of production. For the tire industry, rubber is a key input. If the price of rubber rises, it becomes more costly to produce each tire. As a result, companies may produce fewer tires to maintain profit margins, causing the supply curve to shift to the left.

- Increased input costs lower the profitability. - Companies may reduce production to control expenses. - A leftward shift in the supply curve can lead to higher prices in the market.

By understanding how input costs affect supply, decision-makers can better predict how changes in the market can influence production strategies.

Tax and Subsidy Impact on Supply

Taxes and subsidies are tools used by governments to influence market outcomes. A tax on each unit sold raises the cost for producers, making it less profitable to supply the same quantity of goods. Consequently, this may result in a reduced supply, with the supply curve shifting to the left.

- Taxes increase the cost per unit, reducing supply. - Producers might cut back production, leading to higher prices.
Subsidies, on the other hand, function as a financial aid to producers, lowering the production cost per unit. With reduced costs, it becomes more profitable to produce and sell more goods, which shifts the supply curve to the right.

- Subsidies decrease production costs, increasing supply. - More products in the market can result in reduced prices.
Understanding taxes and subsidies helps in predicting changes in supply and helps industries to strategize accordingly.

Industry Structure and Market Supply

Industry structure, including the number of firms in a market, determines the overall supply capacity. When the number of firms in the tire industry declines, the total output decreases, leading to a leftward shift in the supply curve.

- Fewer firms result in reduced total market supply. - Decreased competition can potentially lead to higher prices.

Similarly, if producers expect lower prices in the future, they may increase current production to capitalize on higher current prices. However, future lower prices can decrease supply, as firms may not find production as profitable.

- Expectations of price changes impact production decisions. - Present market strategies can alter future supply dynamics.

By understanding industry structures and market dynamics, firms can make informed decisions about production and pricing strategies.