3) Using carefully labelled demand and supply diagrams, show the impacts on equi

Question

3) Using carefully labelled demand and supply diagrams, show the impacts on equilibrium price and quantity in the following situations:

(15 points)

a) New cars are normal goods. What will happen to the equilibrium price and quantity of new cars if the price of gasoline falls, the price of steel increases, public transportation becomes more expensive and less comfortable, auto workers receive higher wages, and automobile insurance becomes less expensive? b) Scientists reveal that consumption of oranges decreases the risk of diabetes and, at the same time, farmers use a new fertilizer that makes orange trees more productive. Illustrate and explain what effect these changes have on the equilibrium price and quantity of oranges.

c) The impacts in a particular market

for good ‘x’ which is an inferior good if buyers suffer a fall in their incomes and, at the same time, the price of inputs for good ‘x’ fall

s.

Explanation / Answer

For equilibrium price, a graph is plot between demand and supply. The intersection of the two determines the price. There are factors which might shift the demand/supply curve to left/right. We'll take up each factor and analyse its impact.

a). Price of gasoline falls => this shift the demand curve for cars to the left, as now using personal cars is more expensive than the public transportation. when the curve shift to left, with same supply curve the equilibrium price would fall and quantity demand would also fall.

b). Price of steel increases => this would shift the supply curve to the left. Steel is one of the main component in producing cars. Cost of raw material increase would mean less production of cars. With same demand curve, the equilibrium price would rise. Quantity demand would fall.

c). Public transportation expensive and uncomfortable => the demand curve for cars would shift to the right as now people would demand more cars. Hence the quantity demand would increase and so equilibrium price.

d). Auto workers receive higher wages => the supply curve for cars would shift to right. At higher wages workers would want to produce more. Equilibrium price and quantity demand both would rise.

e). Automobile insurance less expensive => thiis would shift the demand curve to the right. Less expensive means more incentive to buy more cars. Quantity demand would rise and equilibrium price would rise too.

2. More oranges reduces the risk of diabetes implies more demand for oranges and the shift of demand curve to the right. New fertilizers making oranges more productive and yield increases, implying supply curve shifting to right. Simontaneously both the curves are shifting to right, now the determination of equilibrium price depends on the intensity of shift of each curve.

3. Good X is an inferior good, with a fall in income and thefall in price of inputs for good X would mean the consumer would buy more of good X now. A good is inferior when consumer's income is not sufficient to afford a higher quality product. In addition to fall in income, the price of good X has fallen which means consumer will definately switch to good X.

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.