Question

After several years of decline, the market for handmade acoustic guitars is making a comeback. These guitar: are usually made in small workshops employing rela tively few highly skilled luthiers. Assess the impact or the equilibrium price and quantity of handmade acous tic guitars as a result of each of the following events In your answers indicate which curve(s) shift(s) and ir which direction. a. Environmentalists succeed in having the use of Brazilian rosewood banned in the United States, forcing luthiers to seek out alternative, more costly woods. b. A foreign producer reengineers the guitar-making process and floods the market with identical guitars c. Music featuring handmade acoustic guitars makes a comeback as audiences tire of heavy metal and alternative rock music. d. The country goes into a deep recession and the income of the average American falls sharply.

Short answer

a. Supply decreases, equilibrium price increases, quantity decreases. b. Supply increases, equilibrium price decreases, quantity increases. c. Demand increases, equilibrium price and quantity increase. d. Demand decreases, equilibrium price and quantity decrease.

Step-by-step solution

Analyzing the Ban on Brazilian rosewood

First, we need to understand how the ban on Brazilian rosewood affects guitar producers. Since Brazilian rosewood is a preferred material for high-quality guitars, if its usage is banned and luthiers have to use more costly alternatives, this would increase the production costs. Higher cost of production would shift the supply curve to the left, indicating a decrease in supply. This shift in the supply curve leads to a higher equilibrium price and a lower quantity of guitars sold, assuming demand remains constant.

Impact of Foreign Mass Production

Next, we consider the scenario where a foreign producer has reengineered the guitar-making process, resulting in a flood of identical guitars in the market. This would significantly increase the supply of guitars in the market. The supply curve shifts to the right, which would typically result in a lower equilibrium price and a higher quantity sold, assuming the demand remains constant.

Popularity of Acoustic Guitar Music

If music featuring handmade acoustic guitars gains popularity, the demand for these guitars would increase. This increased interest shifts the demand curve to the right, resulting in a higher equilibrium price and quantity, as more people are willing to buy guitars at higher prices.

Economic Recession and Decreased Income

Finally, during a deep recession, the average income of Americans would fall. Handmade acoustic guitars are typically luxury items, so a decrease in income means that fewer people can afford these guitars. The demand curve shifts to the left, leading to a lower equilibrium price and quantity of guitars sold, assuming the supply remains constant.

Key concepts

Supply and Demand Shifts

Understanding how supply and demand shifts affect market equilibrium is a fundamental concept in microeconomics.

Supply and demand are the forces that drive market economies. Supply refers to the total amount of a certain good or service available to consumers, and demand refers to consumers' willingness and ability to purchase said good or service. When either supply or demand changes, it causes the market equilibrium—where supply equals demand—to shift.

For instance, if the supply of handmade acoustic guitars decreases due to the increased cost of materials from a ban on Brazilian rosewood, fewer guitars are available at any given price. This kind of shift would cause the supply curve to shift to the left, resulting in a higher equilibrium price.

Conversely, an increase in the popularity of acoustic guitar music would lead to a rise in demand. More people wanting to buy guitars at any given price shifts the demand curve to the right, which typically results in both a higher price and an increased quantity of guitars sold.

Equilibrium Price Changes

The equilibrium price is the price at which the quantity of goods supplied equals the quantity of goods demanded. It's a critical point of balance in economics, and it changes when either the demand or supply curves shift.

Take, for example, the scenario where foreign producers flood the market with identical guitars, increasing the supply. This influx would shift the supply curve to the right, potentially lowering the equilibrium price of guitars because there are more available than consumers are currently willing to buy at the previous price.

On the other hand, if the demand for guitars rises due to a resurgence in the popularity of acoustic guitar music, this increased demand shifts the curve to the right, leading to a higher equilibrium price. It's essential to discern whether the change in market equilibrium is due to a change in supply, demand, or both to fully evaluate market conditions.

Impact of Production Costs on Supply

Production costs are a critical determinant of supply. When the cost of producing a good rises, suppliers may not be able to sell the product at a previous price while maintaining profitability, thus leading to a reduction in the quantity supplied.

In the case of the handmade acoustic guitar market, when the usage of Brazilian rosewood is banned and more expensive woods are used, production costs go up. Due to these increased costs, guitar producers will supply fewer guitars at any given price unless they can pass these costs on to consumers by increasing prices.

This scenario is graphically represented as a shift to the left of the supply curve. Fewer guitars will be supplied at the same price points, resulting in a higher equilibrium price for consumers, if demand remains constant.

Effects of Consumer Preferences on Demand

Consumer preferences have a profound effect on demand. When consumer tastes change, such as a shift in preference towards handmade acoustic guitars, there is a corresponding effect on the quantity of that good that consumers are willing to purchase at a given price.

The resurgence of interest in genres that feature handmade acoustic guitars can cause the demand curve to shift to the right. This means that, at every price level, more guitars will be purchased compared to before the change in music trends.

If the increased demand due to consumer preferences is strong enough, it can not only increase the equilibrium price but also the equilibrium quantity sold, as suppliers are willing to provide more guitars to meet the heightened demand. These changes in demand underscore the fickle nature of consumer tastes and their direct impact on market equilibrium.