Suppose that a large deposit of iron ore (an input in steel production) has rece

Question

Suppose that a large deposit of iron ore (an input in steel production) has recently been discovered which has lowered the price of iron ore. Show (graphically) and explain, how this will affect the market for steel.

Answer:

Iron Ore (Market)                           Steel (Individual)                             Steel (Market)

When a large deposit of iron ore has been discovered, more supply of iron ore become possible, the supply curve of iron ore shift to the right from S to S’, as the blue cure has shown. The shift of supply curve will cause a decrease on price of iron ore from Pe to Pe1 lead to an increase quantity demand from Qe1 to Qe1. Iron ore is an input in steel production, when the price of iron ore is decreased means the cost of the production of steel is deceased. The second figure displays the individual firm in steel industry, the ATC drops to ATC’, both average total cost meet the minimum point of marginal cost. The individual firm may earn a super normal profit at the start caused by the price drop of iron ore, but under the condition of perfect competition market structure most firms will choose to earn a normal profit which marginal cost equal price. In the steel market, the supply curve of steel will become more elastic then before from S to S’, because a large available raw material result an easy production of steel. Consumers are sensitive about the price change of steel; a small price percentage change of price will cause a large change of quantity supply on the new supply curve S’. The new supply curve of steel offer a lower price than before, then the quantity demand is increased from Qe2 to Qe2.

Can you help me to critique the answer, access the strength and weakness and suggest the improvement

Explanation / Answer

Hey

you have solved this question in a nice way covering my all points . However , there need some improvement.

Improvements

1.Right Shift in supply curve and ATC should be a parallel shift .

2. Explanations should be given in points.

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