Question

Many small boats are made of fiberglass and a resin derived from crude oil. Suppose that the price of oil rises. What happens to the cost curves of an individual boat-making firm and to the market supply curve?

Answer 1

Ans. Increase in price of crude oil increases the cost of manufacturing of fiberglass and resin which makes their producers to decrease supply of these inputs increasing their price in the market due to shortage. This increase in price of fiberglass and resin increases cost of production of boats discouraging its supply. It leads to decrease in supply of boats shifting the supply curve of each individual firm leftwards.
As market supply curve of boats is the horizontal sum of each individual firms supply curve, so, decrease in supply of each individual firm will decrease the market supply shifting the market supply curve leftwards.

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