New Safety Rules Raise Costs
A regulation forces added testing on every unit produced, raising per-unit costs and shifting supply left.
New Safety Rules Raise Costs
Supply and DemandA regulation forces added testing on every unit produced, raising per-unit costs and shifting supply left.
Equilibrium at Quantity 57, Price ($) 44
Start in equilibrium
The market begins in equilibrium where supply meets demand. Producers are covering their costs at the going price and selling everything buyers want at that price.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
Students predict what happens before the graph moves. No accounts, nothing graded.
New Safety Rules Raise Costs, step by step
- 1
Start in equilibrium
The market begins in equilibrium where supply meets demand. Producers are covering their costs at the going price and selling everything buyers want at that price.
- 2
The regulation takes effect
A new rule requires a safety test on every unit before it can be sold, and each test costs money. Production costs are a determinant of supply, so making a unit now costs more and producers will offer fewer units at any price. Supply shifts left.
- 3
A shortage appears
At the original price, buyers still want the old quantity while producers will now bring less to market. That shortage bids the price up.
- 4
New equilibrium
As the price climbs, some buyers drop out by moving up along the unchanged demand curve, and the higher price makes it worth producing a bit more than at the very lowest price. The market clears at a higher price and a smaller quantity.
- 5
Who actually pays for the rule
The rule is written for producers, but the price buyers pay goes up, so buyers carry part of the cost too. On the graph a per-unit compliance cost works just like a per-unit tax, except the money goes to testing rather than to the government.
Where it ends up
A regulation that raises per-unit production costs shifts supply left, so the equilibrium price rises and the equilibrium quantity falls.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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