Many small boats are made of fiberglass and a resin derived...

Name: Problem 1, Chapter 14: Principles of Economics
Uploaded: 2019-05-20T00:23:30-08:00
Duration: 2 min 11 s
Channel: Ben Meadows
Description: Many small boats are made of fiberglass and a resin derived from crude oil. Suppose that the price of oil rises. a. Using diagrams, show what happens to the cost curves of an individual boat-making firm and to the market supply curve. b. What happens to the profits of boat makers in the short run? What happens to the number of boat makers in the long run?

Many small boats are made of fiberglass and a resin derived from crude oil. Suppose that the price of oil rises. a. Using diagrams, show what happens to the cost curves of an individual boat-making firm and to the market supply curve. b. What happens to the profits of boat makers in the short run? What happens to the number of boat makers in the long run?

Many small boats are made of fiberglass and a resin derived from crude oil. Suppose that the price of
oil rises.
a. Using diagrams, show what happens to the cost curves of an individual boat-making firm and to
the market supply curve.
b. What happens to the profits of boat makers in the short run? What happens to the number of boat
makers in the long run?

Key Concepts

Long-Run Equilibrium

In the long run, firms have the flexibility to adjust all inputs and enter or exit the market. Persistent higher costs reduce profitability across the industry, prompting some firms to exit. As unprofitable firms leave, the market eventually reaches a new equilibrium where the remaining firms earn normal profits, though the industry as a whole may shrink in size.

Cost Curves

Cost curves depict how a firm's production cost varies with its output level. They include measures like marginal cost and average cost. When the price of an input, such as resin derived from crude oil, rises, the firm's variable costs increase, causing the cost curves to shift upward. This indicates that producing each unit of output becomes more expensive.

Market Supply Curve

The market supply curve aggregates the output decisions of all firms in the industry. If many firms experience an increase in production costs due to a rise in input prices, each firm's supply decision shifts, leading the overall market supply curve to shift leftward. This shift indicates that at every price level, the total quantity supplied in the market decreases.

Short-Run Profit Analysis

In the short run, firms have fixed costs and limited ability to adjust all inputs, so an increase in input prices directly increases their variable costs. This leads to higher production costs, reducing profit margins or potentially causing losses if the market price cannot adjust sufficiently. The immediate effect is a decline in the profitability of firms despite fixed cost commitments.

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