Market Equilibrium and Price Changes: Question 5
Syllabus 2.4, 2.5
A major aluminium mine unexpectedly closes after flooding, sharply raising the cost of aluminium, the main raw material used to make lightweight city bicycles, while the price of a bicycle itself has not changed. The table below shows the quantity of bicycles demanded each month, together with the quantity supplied at each price both before the mine closure ("original quantity supplied") and after it ("new quantity supplied").
| Price ($) | Quantity demanded (thousand bicycles per month) | Original quantity supplied (thousand bicycles per month) | New quantity supplied (thousand bicycles per month) |
|---|---|---|---|
| 150 | 70 | 30 | 10 |
| 200 | 60 | 40 | 20 |
| 250 | 50 | 50 | 30 |
| 300 | 40 | 60 | 40 |
| 350 | 30 | 70 | 50 |
(a) State the original equilibrium price and equilibrium quantity of bicycles, before the aluminium mine closure. [2]
(b) Explain why the rise in the cost of aluminium causes a shift of the supply curve for bicycles rather than a movement along it, and state the direction of this shift. [3]
(c) Using the "new quantity supplied" column, state the new equilibrium price and equilibrium quantity of bicycles after the mine closure, and describe the overall change in equilibrium price and equilibrium quantity caused by the rise in the cost of aluminium. [3]
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Worked solution
Part (a): Finding the original equilibrium
Equilibrium occurs where quantity demanded equals original quantity supplied. Checking the table:
| Price | Qd | Original Qs |
|---|---|---|
| $150 | 70 | 30 |
| $200 | 60 | 40 |
| $250 | 50 | 50 |
| $300 | 40 | 60 |
| $350 | 30 | 70 |
Only at $250 do the two quantities match, both at 50 thousand bicycles per month. This is the original equilibrium price and quantity, before the mine closure.
Part (b): Why this is a shift, not a movement
The price of a bicycle itself has not changed anywhere in this scenario. What has changed is the cost of aluminium, a raw material used to make bicycles. A change in production costs is a non-price determinant of supply, so it shifts the whole supply curve; it does not simply move manufacturers to a different point on the same curve.
Reasoning through the effect:
- Aluminium becomes more expensive, so the cost of making each bicycle rises.
- At any given selling price, bicycles are now less profitable to produce than before.
- Manufacturers are therefore willing and able to supply fewer bicycles at every possible price.
This means the supply curve for bicycles shifts to the left: supply has decreased. This matches the table. At every price row, the “new quantity supplied” is lower than the “original quantity supplied”.
Part (c): The new equilibrium after the shift
Equilibrium after the mine closure occurs where quantity demanded equals the new quantity supplied. Checking the table:
| Price | Qd | New Qs |
|---|---|---|
| $150 | 70 | 10 |
| $200 | 60 | 20 |
| $250 | 50 | 30 |
| $300 | 40 | 40 |
| $350 | 30 | 50 |
Only at $300 do the two quantities match, both at 40 thousand bicycles per month. This is the new equilibrium.
Comparing the two equilibria:
- Equilibrium price rises, from $250 to $300.
- Equilibrium quantity falls, from 50 thousand to 40 thousand bicycles per month.
This is exactly what is expected from a leftward shift of the supply curve, with the demand curve unchanged: price rises, but quantity falls, since fewer bicycles are now supplied at every price and buyers must be drawn up the (unchanged) demand curve to a point of lower quantity.
Final answers
- (a) Original equilibrium: price $250, quantity 50 thousand bicycles per month.
- (b) The supply curve shifts left (supply decreases), because the rise in the cost of aluminium makes bicycles less profitable to produce at every price. This is a shift, since the bicycle’s own price never changed.
- (c) New equilibrium: price $300, quantity 40 thousand bicycles per month. Overall, equilibrium price rises and equilibrium quantity falls.