3 economics and management problems

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Analytical Questions for DISCUSSION Economics and Management
1) For each of the following changes, state what will happen to market equilibrium price and quantity in the short run.
(Use the demand curve)
a. Consumers expect that the price of the good will be higher in the future.

Solution:
When consumers expect that the price of the good will increase in the future, they will demand more goods now. So, the demand curve will shift to the right resulting in an increase in the market equilibrium price & increase in quantity in the short run. This is shown in the following graph.

In the above figure, D & S denotes the original demand & supply curves. P & Q are the market equilibrium price & quantity. Due to the consumers expectation about the future increase in price, the demand curve is shifted to D* which leads to an increase in the market equilibrium price & quantity as P* & Q*.

b. The price of a substitute good rises.

Solution:

If the price of a substitute good rises, then the demand for the good will increase & the demand curve will shift to the right. This results in higher market equilibrium price & quantity in the short run.

In the above figure, due to the increase in the price of the substitute good, the demand is increased & shifted to D*. Thus, a rightward shift in the demand curve leads to higher market equilibrium price (P*) & quantity (Q*).

c. Consumer incomes fall, and the good is normal.

Solution:

A fall in the consumer income leads to a decrease in the demand for normal good & the demand curve will shift to the left. This results in lower market equilibrium price & quantity. This impact is shown in the following figure.

Due to the decline in consumers income, the demand curve is shifted to the left as D* resulting in a decline in the market equilibrium price & quantity as ...