Question

If the cost of steel increases, then the supply of cars will shift and this shift would cause a shortage of cars to open up at the old equilibrium price (i.e., the price before the supply shifted).
True/False

Answer 1

Answer:

TRUE

Explanation:

Supply is sellers ability and willingness to sell a good at given price, time period.

Price of Inputs is a factor negatively effecting Supply. This implies decrease in supply at high input prices (because of lower profit margin), increase in supply at low input prices (because of higher profit margin).

Increase in Supply means rightwards shift in upward sloping supply curve, Decrease in Supply means leftwards shift in upward sloping supply curve.

Steel is an input used in car manufacturing; so increase in steel price will decrease car supply & shift the supply curve leftwards. This will create excess demand/ deficient supply/ shortage of cars in the market at old equilibrium price.

This shortage will then create competition among buyers & increase price, which will contract demand & expand supply - establishing new equilibrium.