Question

Question 3.6 Suppose the price of shoe leather rises. Ceteris paribus, a. what effects would that have on the market for leather shoes? b. what would happen to the quantity demanded of shoe leather? c. what would happen to the price and quantity of shoes? Illustrate your answers with a well-labeled graph.

Answer 1

(a)

Shoe leather is used in making of leather shoes. If the price of shoe leather rises then this will increase the cost of making leather shoes.

This increase in cost will reduce the profit margin for firms making leather shoes. This will induce them to reduce production and thereby the supply.

So, the supply of leather shoes in the market for leather shoes will decrease.

Following is the required figure -

(b)

As above figure shows, decrease in supply of leather shoes as shown by the leftward shift of supply curve has resulted in market equilibrium moving upward along the demand curve (from E to E1).

This upward movement indicates that the quantity demanded of shoe leather has decreased.

(c)

As the above figure shows,

The price of shoes has increased while the quantity of shoes has decreased.