Question

If all firms in a competitive industry are legally required to meet new regulations that increase their costs of production, what happens to the good's:

a. demand
b. supply

Answer 1

New regulations that increase firms' production costs in a competitive industry cause the supply curve to shift left, indicating a lower quantity supplied at any given price, while demand initially remains unchanged. Higher production costs may result in higher prices for consumers, potentially affecting demand over time.

Step-by-step explanation:

When a competitive industry is required to comply with new regulations that increase their production costs, it impacts the supply of the good in the market. The cost increase typically causes a shift in the supply curve to the left, indicating that the quantity supplied at any given price will be lower. This is due to the higher cost of production making it less profitable or more expensive to produce the same amount of goods. Meanwhile, the demand for the good remains unchanged because the change in regulations affects the production side of the market, not the preferences or purchasing power of consumers.

As a result of this leftward shift in supply, we can expect the market price of the good to increase if demand remains constant. Producers may try to pass on the additional costs to consumers in the form of higher prices. Over time, if the increased prices lead to a decrease in quantity demanded, the demand curve may shift to the left, reflecting a lower quantity of goods demanded at each price.

Answer 2

If all firms in a competitive industry are legally required to meet new regulations that increase their costs of production, the supply of goods would decrease.

Explanation:

• In order to comply with the new regulations in place and still keep the business profitable, the businesses would choose to decrease production in order to keep the initial cost of production in control (or in the range that it was in before the introduction of new regulations).

• The firms would take steps in order to avoid market fluctuation and the step of decreasing the production of goods to keep the price stable would be one of those steps.