Question

Steel production releases toxic air pollutants. As a result, the Government has established several restrictions on steel production, making more expensive for steel production firms to operate. Also, recent technological advances in plastics has reduced the demand for steel products. Use Supply and Demand analysis to predict how these shocks will affect equilibrium price and quantity of steel. Can we say with certainty that the market price for steel will fall? Why?

Answer 1

With an increase in the cost of production, supply of steel will shift to the left direction and increase in popularity as well as technological development in plastic, will shift the demand of steel to the leftward direction. It will create a new equilibrium quantity and price. Here, the quantity of steel output will decrease (as shown by Q1 in both the scenario) with certainty. But, the change in price of steel will depend upon the degree of decrease in demand and supply. If the left shift in supply is greater than the left shift in demand, then the price will increase as shown in scenario -1 graph. If the left shift in demand is greater than the left shift in supply, then price will decrease as shown in scenario -2 graph.