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If the price of steel, an input into the production of automobiles, rises, and at the...

If the price of steel, an input into the production of automobiles, rises, and at the same time the price of gasoline decreases, what will happen to the equilibrium price and quantity of automobiles? Explain using Supply and Demand.

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Answer #1

So, increase in price of steel, which is an input would lead to increase in the cost of production of cars. As a result, the supply curve shifts upwards to the left. As a result, price increases and quantity decreases.
If the price of gasoline decreases which is a complimentary good for automobiles, it is probably likely that the consumer decides to travel more frequently by car/ hire cabs more frequently, pushing up the demand for automobiles. Hence, the demand curve shifts to the right. As a result, price increases and the quantity increases.

As a combined effect of the two processes, we can say that the price level will definitely increase, while the effect of quantity cannot be determined. It can increase, decrease or remain the same.

See the graph for the same.

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