Question

Remember: Changes in supply determinants shift supply, and changes in demand determinants shift demand. We say that a shift of supply does not cause a shift of demand, and vice-versa, because it is the adjustment of the market price (via the elimination of temporary shortages and surpluses) that allows the market to arrive at an equilibrium price that causes a stable condition where quantity supplied = quantity demanded.

Please analyze the following scenario with a graph, accompanied by a complete analysis in paragraph form, to address the following scenario:

Use a standard supply and demand analysis to predict the effects of this scenario in the bicycle tire market.

Assume that the supply of bicycle tires in the US includes both domestic and foreign firms who produce bicycle tires. Assume that a new higher import tariff (a business tax) is imposed on foreign bicycle tire producers. Did the import tariff on foreign producers cause a shift of bicycle-tire supply or steel demand? Which curve and why? Which direction? What is the predicted impact on the equilibrium bicycle-tire price and equilibrium bicycle-tire quantity associated with this change in the import tariff? Does this predicted end-result make sense to you – do you think it would happen in the real-world bicycle-tire market? Defend your answer.

Answer 1