My scenario is childcare firms being forced by gov\'t regulations to improve the

Question

My scenario is childcare firms being forced by gov't regulations to improve the quality of their workers such as better education which increased the demand for services.  At the same time, this increases the cost of firms providing these services.

I believe this will shift ths S-curve to the left and the D-curve to the right but I don't quite understand what it does to the total quantity of services purchased.  It appears that the shift of each curve counteracts the other and I can't figure out an explanation for whether there would be an increase or decrease in quantity.  Also, does it matter which side of the original equilibrium line I draw the curved lines?  I know this will create a new equilibrium I just don't know the effect on P and Q.

Explanation / Answer

Obviously price increases because both shifts increase price. You are right to be confused as to what happens to quantity. The decrease in supply decreases quantity while the increase in demand increases quantity. If the demand shift is larger than the supply shift or supply is more price-elastic than demand, then there will be a net-increase in quantity. Similarly, if the supply shift is larger than the demand shift or demand is more price-elastic than supply, then there will be a net-decrease in quantity. If you aren't given any information about the price-elasticity of demand and supply or the relative sizes of the shifts, then you cannot know the net-effect on quantity. Look at the problem carefully. Are you given any information that tells you the relative sizes of the shifts? Are you given any information about elasticity? If not, then the correct answer is that you can't know the effect on quantity. Another thing to consider is that the firms have to be forced to improve quality. That means that for any given firm, it is not profitable to improve quality (the costs outweigh the additional revenues from increased demand). So, it is likely that the supply shift is greater than the demand shift, which means that quantity decreases. This is not necessarily a safe path of logic though because firms could be in a prisoner's dilemma where one firm improving quality is unprofitable while all firms improving quality is profitable for each firm. The best answer is probably that the change in quantity is ambiguous.

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