Using demand and supply analysis, tell what the effect of on the market for cigarettes will be if wages increase substantially in states that grow tobacco.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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If this happens, the equilibrium price will (all other things being equal) go up while the equilibrium quantity bought and sold will go down.  This will occur because of a drop in supply.

One non-price determinant of supply is the cost of inputs.  The wages of the workers in the tobacco industry are an input that goes into cigarettes.  When the workers' wages increase, the cost of making cigarettes increases.  This causes supply to decline.

A decline in supply is shown on a graph by a movement of the supply curve to the left.  This results in a higher equilibrium price and lower equilibrium quantity.

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