A main component used in the production of drum heads has risen in price by 9%. Demonstrate the effect this has on the equilibrium price and quantity of drum heads.

Question

Business

Gaige Newton

28 October, 09:16

A main component used in the production of drum heads has risen in price by 9%. Demonstrate the effect this has on the equilibrium price and quantity of drum heads.

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Answers (1)

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Mathis · Answer 1

Basically, an increase in the price of the main component used in drum head production will lead to a decrease in the overall supply of drum head and an increase in the equilibrium price of drum heads in the market, everything else held constant.

Explanation:

An increase in the price of the main component used in drum head production by 9% implies an increase in the overall cost or expense of producing drum heads by the drum head producers or firms. Hence, a price increase of the main component used to make drum heads will lead to a decrease in the total or overall supply of drum heads in the market, illustrated by a leftward or upward shift of the market supply curve of drum heads in the graphical model of drum heads market. Now, as the market supply curve for drum heads shift rightward or upward, the equilibrium price of drum head in the market will increase, as the market supply of heads have decreased with no change in the market demand of drum heads and everything else being held constant.