The cost of labor used to produce smartphones increased, and consumers expect the price of smartphones to increase in the future. If it is known that the effect of these changes is greater on demand than it is on supply, what is the effect on equilibrium price and quantity in this market?

Question

Quizplus · Accepted Answer

The increase in labor costs would typically decrease supply (shift the supply curve to the left), increasing the price and decreasing the quantity of smartphones. However, if consumers expect prices to rise in the future, demand will increase now (shift the demand curve to the right), further increasing the price and potentially increasing the quantity. Since the effect on demand is greater, both price and quantity will increase.

The Cost of Labor Used to Produce Smartphones Increased, and Consumers