Suppose that bicycles are produced by a perfectly competitive, constant cost industry. Which of the following will have a larger effect on the long-run price of bicycles: (1) a government program to advertise the health benefits of bicycling, or (2) a government program that increases the demand for steel, an input in the manufacture of bicycles that is produced in an increasing cost industry? Explain briefly.
To determine which of the two government programs will have a larger effect on the long-run price of bicycles, we need to analyze the impact of each program on the supply and demand factors of the bicycle market.
1) Government program to advertise the health benefits of bicycling:
The advertisement program's aim is to increase consumer awareness about the health benefits of bicycling, which may lead to an increase in the demand for bicycles. If the demand for bicycles increases, the equilibrium price and quantity of bicycles in the market will also be affected. In the short run, when the industry operates under constant costs, an increase in demand will result in a temporary increase in the price of bicycles. However, in the long run, due to the perfectly competitive nature of the industry, new firms will likely enter the market, resulting in an increase in the supply of bicycles. This increased competition will drive the price back down towards the original equilibrium level. Thus, in the long run, the government program to advertise the health benefits of bicycling will not have a substantial effect on the long-run price of bicycles, as the industry will adjust to the increased demand.
2) Government program to increase the demand for steel:
The program aims to increase the demand for steel, an input in the manufacture of bicycles. If this program is successful, the increased demand for steel will increase its price. As steel is a major input in bicycle production, the increase in its price will raise the production costs for bicycle manufacturers. In a perfectly competitive industry, where firms operate under constant costs, an increase in input costs will directly translate into an increase in the long-run price of bicycles. Therefore, the government program that increases the demand for steel, an input produced in an increasing cost industry, will have a larger effect on the long-run price of bicycles compared to the program to advertise the health benefits of bicycling.
In summary, the government program that increases the demand for steel will have a larger effect on the long-run price of bicycles as it directly affects the input costs of bicycle production, whereas the program to advertise the health benefits of bicycling will have a more temporary or limited impact on the price due to the nature of the industry's perfect competition.