The accompanying graph represents the supply of printer ink cartridges. The current price of ink (per cartridge) is $20 and indicated by the point on the supply curve. Suppose the price of cartridges increases to $24. Illustrate on the graph how the market for Ink Cartridges changes. The graph contains individual supply curves for the only two firms in a hypothetical market for stuffed animals. Place the market supply curve at the correct location on the graph. Then, consider what would happen to the market if a third supplier enters the market, holding all else constant. A third firm would mean market supply increases. market supply decreases. Firm 1 and Firm 2 would lower output to accommodate the new supplier in order to keep market supply constant. higher prices of stuffed animals.
The Correct Answer and Explanation is:1
The correct answer is: Market supply increases.
Explanation:
In economics, market supply is the horizontal sum of all individual firms’ supply curves at each price level. When we examine the supply graph for printer ink cartridges (or any product like stuffed animals), each firm’s supply curve shows the quantity it is willing to supply at various prices. For example, Firm 1 and Firm 2 each have their own supply curves, and together they form the initial market supply curve.
If the price of cartridges increases from $20 to $24, both firms will be willing to supply more cartridges, as higher prices typically increase the incentive to produce due to the potential for higher profits. This is a movement along the supply curve, not a shift.
Now, if a third firm enters the market, the total quantity supplied at each price increases. This results in a rightward shift of the entire market supply curve because the market now includes an additional supplier contributing to total supply. Therefore, market supply increases.
Let’s clarify why the other answer choices are incorrect:
- “Market supply decreases” is wrong because adding another firm increases total supply.
- “Firm 1 and Firm 2 would lower output to accommodate the new supplier” is incorrect; firms are price takers in a competitive market and produce according to price, not to accommodate others.
- “Higher prices of stuffed animals” contradicts the law of supply and demand: increased supply (with demand held constant) typically leads to lower prices, not higher ones.
In conclusion, a third supplier entering the market shifts the market supply curve to the right, representing an increase in supply at every price level. This change reflects the competitive nature of the market and aligns with the fundamental principles of supply behavior in microeconomics.