Put yourself in the place of a blacksmith during the early years of the 20th century. Assume you and all the other blacksmiths in the town were doing as well as any alternative options that were available. Then cars began to arrive and fewer horses needed horseshoes. Describe, using terms from this chapter, the sequence of events that ultimately led to you closing your shop and hunting another job.

Question

What will be an ideal response?

Answer 1

First, your demand shifted a bit left as a few customers bought cars. Your profit went down but, because the fixed costs of your building and equipment were paid, you still had more income than the wages of the alternative job you felt you could get. However, as cars become popular, demand kept shifting left and you had to keep lowering your price as all your competitors did to try to attract more customers. Before long the cost of iron, nails and coal for heat that were inputs into the business was greater than your revenue. With the average variable costs above the price it became clear that you were worse off operating than if you shut down. At this point you shut down and seek other work.