Question

Curling is a sport that involves sliding a granite stone over a patch of ice. The Winter Olympics has generated a lot of excitement about the fascinating sport of curling. As a result, demand for curling stones has increased. Curling stones are made from blue Trefor granite. There are limited deposits of blue Trefor, and other types of granite are poor substitutes. If the increase in demand for curling stones persists, do you expect the long-run equilibrium price to increase, decrease, or stay the same?

Short answer

The long-run equilibrium price is expected to increase.

Step-by-step solution

Understand the Exercise Context

We are asked to analyze the impact on the long-run equilibrium price of curling stones due to increased demand, considering the limited availability of blue Trefor granite used exclusively for curling stones.

Define Economic Terms

In economics, 'long-run equilibrium' refers to a state where supply equals demand, with no incentive for change. Price is determined by how much people are willing to pay for a product and how much suppliers are willing to provide.

Assess Supply Constraints

Since blue Trefor granite deposits are limited, the supply of stones cannot easily increase. This constraint implies that even if demand increases, supply cannot match this increase swiftly.

Analyze Demand Increase

Due to the increased popularity of curling, there's a higher demand for curling stones. A demand increase, with a constant supply, usually leads to upward pressure on prices.

Consider Substitution Effects

The problem states that other granite types are poor substitutes, meaning that purchasers cannot easily switch from blue Trefor to other granite. This lack of substitution strengthens the price rise because the high demand cannot be diverted elsewhere.

Draw a Conclusion

With limited supply and increased demand for a product with few substitutes, economic theory suggests the long-run equilibrium price will increase.

Key concepts

Understanding Supply and Demand

Supply and demand are fundamental concepts in economics. They describe how the quantity of a product available (supply) and the desire for that product (demand) determine prices.
When demand for curling stones increases, as it does when the sport becomes popular, suppliers can't match it because blue Trefor granite is limited. This is a situation where demand outweighs supply.
In such scenarios, there's pressure on prices to rise because more people want the stones than there are stones available for sale. Suppliers, knowing this, can raise their prices because buyers are likely willing to pay more to secure the limited stones. It's essentially a basic dynamic where more people wanting a few items drive up the cost.

Explaining the Substitution Effect

The substitution effect occurs when consumers switch from one product to another due to price changes. However, this is less likely with curling stones.
The reason is simple: there are not good substitutes for the blue Trefor granite stones used in curling. While there might be other types of granite, they don't perform as well or are simply not accepted in professional games.
This lack of substitutes means when the price of curling stones goes up, consumers can't just turn to a different type of stone. They need the specific ones made from the sought-after blue Trefor granite. So, even with price increases, demand may remain strong because the substitution effect has little influence.

How Price Determination Works in This Scenario

Price determination in the context of curling stones is tied to the forces of supply and demand, and the absence of suitable substitutes.
When demand increases, prices typically rise unless the supply can also increase. But here, the supply is constrained by the limited availability of blue Trefor granite.

• Suppliers, recognizing the strong demand and limited competition, can set higher prices.
• Consumers, driven by the popularity of curling, may be willing to pay more, supporting the higher prices.

In situations where higher prices do not lead to a decrease in demand, because the product has few substitutes, the long-run equilibrium price will likely rise.
Moreover, the prospect of higher profits for suppliers means they have little incentive to lower prices until demand decreases or competitors find ways to produce equivalent quality stones.