Supply and Demand

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Supply and Demand

Analytical Questions

1) For each of the following changes, show the effect on the demand curve, and state what will happen to market equilibrium price and quantity in the short run.
a. Consumers expect that the price of the good will be higher in the future.
They will increase the purchases today while the good is cheaper. This will shift the demand curve to right.

b. The price of a substitute good rises.
Since substitute good is costlier, consumers would buy more of this good. The demand curve will shift to right.

c. Consumer incomes fall, and the good is normal.
For a normal good, fall in income will result in lower consumption. The demand curve will shift to left.

d. Consumer incomes fall, and the good is inferior.
For an inferior good, fall in income will result in higher consumption. The demand curve will shift to right.

e. A medical report is published showing that this good is hazardous to your health.
The consumers will hesitate to use this product and hence the demand curve will shift to left.

f. The price of the good rises.
No shift in the demand curve. The moment will be along the demand curve. The quantity demanded will decrease.

2) For each of the following changes, show the effect on the supply curve, and state what will happen to market equilibrium price and quantity in the short run.
a. The government requires pollution control filters that raise good on costs.
Suppliers will be willing to supply lower quantity at each price level due to rise in their cost of production. Supply curve will shift to left.

b. Wages of workers in this industry fall.
The cost of production will decrease. Supplier will be willing to supply higher quantity at each price level due to decline in their cost of production. Supply curve will shift to right.

c. There is an improvement in technology.
The productivity and hence the cost of production will decline due to improvement in technology. The supply curve will shift to right.

d. The price of the good falls.
No shift in the supply curve. The moment will be along the supply curve and quantity supplied will decrease.

e. Producers expect that the price of the good will fall in the future.
Since prices are expected to fall in future, producers would like to sell as much as they can now at the current price level. Thus, supply curve will shift to right.

3) Suppose that the demand for oranges increases. Carefully explain how the mechanics/function of price will restore market equilibrium.
See the graph below. As the demand for oranges increases, the demand curve will shift to right. This will result in shortage in the market, as the quantity demanded at price P1 will increase to Q3 while the supply will remain at Q1. The shortage will result in increase in prices and increase ...