Lumber and brick are substitutes in home construction. Consider the market for bricks depicted in the graph. Suppose the price of lumber increases due to new regulations for the logging industry. Shift one or both curves in the graph to illustrate the impact this change will have on the market for bricks. Equilibrium price is now $ Equilibrium quantity is now
The correct answer and explanation is:
When the price of lumber increases due to new regulations in the logging industry, builders will look for alternative materials, such as bricks, to replace lumber in home construction. Since lumber and bricks are substitutes, the demand for bricks will increase as a result of the higher lumber prices.
Market Impact:
- Demand Curve Shift: The increase in demand for bricks will cause the demand curve to shift to the right because more builders are now willing to buy bricks at every price level.
- New Equilibrium Price & Quantity: As demand increases, both the equilibrium price and equilibrium quantity of bricks will rise. The exact new values depend on the magnitude of the shift in demand and the price elasticity of supply.
Graph Interpretation:
- Initial Equilibrium: The original intersection of the supply and demand curves determines the initial price and quantity of bricks.
- New Equilibrium: The rightward shift in the demand curve leads to a new intersection with the supply curve at a higher price and a greater quantity of bricks sold.
Explanation:
- Substitution Effect: Since lumber has become more expensive, the relative attractiveness of bricks increases.
- Higher Demand: More homebuilders switch to bricks, leading to greater competition among buyers.
- Price & Quantity Adjustment: The shortage of bricks at the initial price will push prices higher, incentivizing suppliers to produce and sell more bricks, which moves the market to a new equilibrium.
Thus, the new equilibrium price will be higher than before, and the equilibrium quantity will also be greater. Now, I will generate an image illustrating this shift in the brick market.