Answer to Question #161633 in Microeconomics for louise

Question

If the demand for shoes increases at the same time as the shoe industry adopts labor-saving technology for making shoes, the equilibrium quantity for shoes will increase, but the effect on the equilibrium price of shoes is ambiguous.

True or false?

Answer 1

$\bold {Answer}$

$True$

$\bold {Explanation}$

Labour-saving technology for making shoes will increase supply. As a result, the supply curve will shift rightwards, increasing the equilibrium quantity and lowering the equilibrium price. On the other hand, an increase in demand shifts demand curve upwards and rightwards, increasing both the equilibrium quantity and price.

This follows that both an increase in demand and supply affect equilibrium quantity positively. Thus, the equilibrium quantity will increase. However, they have opposing effect on price; an increase in demand increases price, yet an increase in supply reduces the price. This opposing force makes the movement in equilibrium price indeterminant. The overall effect on equilibrium price is, thus, determined by the respective magnitudes by which demand and supply increase, and on the relative elasticities of demand and supply.