Answer to Question #265738 in Microeconomics for Dan

Question

Due to several supply-chain issues the price of computer chips has risen in recent months (this part is true and there is no need to prove it to be so). The result of this change would be to increase the price of automobiles that require many computer chips in their manufacture. 

Answer 1

In the diagram above, initial equilibrium for automobiles is given by E₁ where equilibrium quantity is Q₁ and equilibrium price is P_1. As automobiles and computer chips are seen as complementary goods, and computer chips are raw- materials to automobiles, any increase in the price of computer chips would increase the cost of production of automobiles that use computer chips in their production. The increase in the price of raw materials will increase the price and decrease the quantity of production of automobiles. So, the decrease in the production of automobiles, will shift the supply curve from S₁ to S₂. The price of automobiles increases from P₁ to P₂ and quantity decreases from Q₁ to Q₂.