Updated June 25, 2015
| The marginal cost illustration on the left depicts an auto firm that is less reliant on steel than its counterpart in the middle. Thus, an increase in the cost of steel will only increase its marginal cost curve slightly and result in an increase in quantity produced for that firm. Conversely, its steel-dependent rival's cost curve will increase such that its total quantity produced will decrease, resulting in an aggregate automobile-supply decline as portrayed in the right graph. |
This is a depiction of an increase in the marginal cost curve due to a price increase of an input, which is already possessed by many of a firm's direct customers. Total quantity output is reduced, while final output price increases. In this way, the increase in price acts as a tax on incremental output, hurting downstream customers as a result of the SSNIP. Incumbent customer producers actually benefit from the price increase.
This demand curve illustrates a highly inelastic demand environment in which input customers pass through all of a price increase to their customers. Quantity is reduced slightly (although price increases drastically), therefore affecting the midstream customers slightly (perhaps even benefiting them, described in the figure on page 11). Downstream/Final customers are affected far more, as they absorb the full effects of higher prices.