Assume there are three markets: A: Wool; B: Synthetic Fiber; C: Business Travel. Assume we are in the years after the introduction of synthetic fibers. Using demand and supply analysis explain what happens in the SHORT RUN in all three markets and why?
To analyze the short-run effects of the introduction of synthetic fibers on markets A (Wool), B (Synthetic Fiber), and C (Business Travel), we need to consider the changes in demand and supply for each market.
1. Market A: Wool
- Demand: The demand for wool is likely to decrease in the short run due to the substitution effect. With the introduction of synthetic fibers, consumers will have an alternative, which may be cheaper and more readily available. This decline in demand leads to a leftward shift in the demand curve for wool.
- Supply: The supply curve for wool is less affected in the short run. However, if wool producers anticipate a decline in demand, they might decrease their production levels.
Result: With a decrease in demand and potential decrease in supply, the short-run equilibrium quantity and price of wool will decrease.
2. Market B: Synthetic Fiber
- Demand: The demand for synthetic fibers is likely to increase in the short run due to the substitution effect. Consumers looking for alternatives to wool will turn to synthetic fibers, increasing their demand. This leads to a rightward shift in the demand curve.
- Supply: In the short run, the supply of synthetic fibers may not be able to keep up with the sudden increase in demand. Manufacturers might need time to adjust their production levels.
Result: With an increase in demand and limited supply, the short-run equilibrium quantity and price of synthetic fibers will increase.
3. Market C: Business Travel
- Demand: The demand for business travel might experience mixed effects in the short run. On one hand, businesses may substitute in-person meetings with video conferencing due to the convenience and cost-effectiveness of synthetic fibers. This could decrease the demand for business travel. On the other hand, if the production of synthetic fibers stimulates economic growth, it might lead to more business activities and an increase in demand for business travel.
- Supply: The supply of business travel services is relatively fixed in the short run. Airlines and hotels may face some limitations in rapidly adjusting their capacity to meet changes in demand.
Result: The short-run outcome in the business travel market depends on the balance between the substitution effect and potential economic growth. It could result in a decrease, increase, or remain relatively stable, depending on the magnitude of these factors.
It's important to note that these short-run effects can vary depending on the specific market conditions, elasticity of demand and supply, and time taken for producers and consumers to adjust to the new realities. A more precise analysis would require data specific to each market and a deeper understanding of the industry dynamics.