Question

Consider the market for cars. Which determinant of supply is affected by each of the following events? Choose from: prices of related goods, technology, prices of inputs, expectations, and the number of sellers in the market. [LO 3.4] a. A steel tariff increases the price of steel. b. Improvements in robotics increase efficiency and reduce costs. c. Factories close because of an economic downturn. d. The government announces a plan to offer tax rebates for the purchase of commuter rail tickets. e. The price of trucks falls, so factories produce more cars. f. The government announces that it will dramatically rewrite efficiency standards, making it much harder for automakers to produce their cars.

Short answer

a) prices of inputs; b) technology; c) number of sellers; d) expectations; e) prices of related goods; f) expectations.

Step-by-step solution

Analyze the Effect of a Steel Tariff

A steel tariff increases the price of steel, which is an input in car production. Higher input prices typically reduce supply because producing the same quantity of goods becomes more expensive for manufacturers. Therefore, the determinant of supply affected here is the 'prices of inputs'.

Consider Improvements in Robotics

Improvements in robotics increase efficiency and reduce costs in production. This advancement in technology allows manufacturers to produce more cars at lower costs, shifting the supply curve to the right. Thus, the determinant of supply affected is 'technology'.

Evaluate Factory Closures

Factories closing as a result of an economic downturn means there are fewer producers in the market. The decrease in the number of sellers leads to a decrease in supply. Therefore, the determinant of supply affected is the 'number of sellers in the market'.

Examine the Effect of Tax Rebates for Commuter Rail Tickets

The government plan to offer tax rebates for commuter rail tickets may reduce demand for cars, causing car manufacturers to adjust their production expectations. Although this relates to demand, in terms of supply, it’s an 'expectation' about future market conditions affecting supply decisions.

Assess the Impact of Falling Truck Prices

If the price of trucks falls and causes factories to produce more cars instead, it reflects the concept of 'prices of related goods'. Car manufacturers may switch from producing trucks to cars if cars become relatively more profitable to produce.

Address New Efficiency Standards

The government announcing new and tougher efficiency standards makes it harder to produce cars under existing guidelines. This affects car manufacturers' expectations about future production costs and regulatory environments, thus affecting supply through 'expectations'.

Key concepts

Prices of Inputs

In the world of supply, prices of inputs are a key factor determining how much of a product can be produced. Inputs are the resources needed to create a product, such as raw materials, labor, and energy. When the prices of these inputs rise, it becomes more costly for manufacturers to produce goods. This typically results in a decrease in supply. For instance, if a steel tariff increases the price of steel, a major input in car manufacturing, this makes car production more expensive. As a result, manufacturers might produce fewer cars because the cost of maintaining the same production levels has increased. Understanding how input prices affect supply is important because it helps explain why sometimes products can be scarcer or more expensive in the market.
When input prices decrease, the opposite effect is seen: supply can increase as it becomes cheaper to produce goods. Cheaper inputs mean manufacturers can afford to produce more of the product without raising prices, benefiting both the producer and consumer.

• Higher input prices increase production costs, reducing supply.
• Lower input prices decrease costs and can lead to higher supply.

Technology in Production

Technology plays a crucial role in production by determining how efficiently products are made. Advances in technology, such as improvements in robotics, can make production more efficient, reducing the cost of manufacturing. This can shift the supply curve to the right, meaning that more products can be supplied at the same price. In the context of car production, improvements in robotics can lower the costs by automating processes and increasing output with the same or fewer resources. This allows manufacturers to produce more cars without increasing costs, boosting overall supply.
On the contrary, if there are technological setbacks or failures, it can lead to higher costs and a reduced supply of goods. Therefore, staying up-to-date with technology is vital for maintaining competitive production levels.

• Technology improvements lead to lower production costs and increased supply.
• Technological setbacks can increase costs and reduce supply.

Market Expectations

Market expectations play a pivotal role in determining supply as they relate to what manufacturers anticipate in the future. Expectations influence production decisions, especially if businesses foresee changing conditions that will affect demand or costs. For example, knowing that the government plans to offer tax rebates for commuter rail tickets might lead car manufacturers to reduce production, anticipating lower car demand in the future. This perspective shift affects decisions on current supply, as manufacturers adjust their output to align with expected future consumption patterns.
A producer’s expectations about future prices, input costs, and regulations can significantly influence the supply. A forecast of increased future demand may encourage manufacturers to increase supply now, while expecting higher future costs might lead them to reduce supply today.

• Expectations about future demand or costs influence current supply decisions.
• Changes in regulations or consumer behavior can alter supply based on expectations.

Number of Sellers

The number of sellers in a market directly affects the overall supply of a commodity. If more suppliers enter the market, supply increases because more sellers are producing the good. Conversely, if sellers exit the market, supply decreases due to fewer products being manufactured. This is apparent during economic downturns when companies might close factories or reduce their production capacity, thereby reducing the number of sellers in the market.
The entry of new sellers can stimulate competition, often leading to more innovative products and lower prices for consumers due to higher supply. Meanwhile, fewer sellers can limit choices and potentially increase prices due to reduced supply.

• More sellers in the market increase the supply.
• Fewer sellers decrease supply and can lead to higher prices.

Prices of Related Goods

Prices of related goods significantly influence supply decisions because manufacturers might pivot resources based on relative profitability. When the price of a related good, like trucks, decreases, manufacturers may switch to producing more of another good, like cars, if it becomes relatively more profitable. This switching reflects manufacturers' strategic decisions to capitalize on market conditions to maximize profits.
Goods can be substitutes or complements, and changes in the price of one can affect the supply of the other. For instance, if the price of a substitute like trucks falls, factories might focus more on producing cars if they expect better margins there. Understanding this concept helps explain why changes in the supply of one product often affect the supply dynamics of related products in the market.

• Changes in prices of related goods influence supply decisions.
• Producers adapt based on relative profitability of goods.