EXERCISE 11.1 A SUPPLY SHOCK AND ADJUSTMENT TO A NEW MARKET

Consider a market in which bakeries supply bread to the restaurant trade. A new technology becomes available to the bakeries, shifting the supply curve as shown in the figure.

1. Explain why the bakeries would want to increase sales. Why can they not do so at the original price?
2. Describe how the actions of bakeries could adjust the industry to a new equilibrium.
3. Is it always the seller who benefits from the economic rents that arise when the market is in disequilibrium?
4. What action might restaurants take while the market is not in equilib- rium?

4.5 4.0 Original supply (MC) 3.5 3.0 2.5 Price (E) A Excess supply 2.0 B New supply (MC) 1.5 Economic rent 1.0 0.5 Demand 0 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Quantity of loaves