Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
7Activity
0 of .
Results for:
No results containing your search query
P. 1
Section Exam 1 - Question 1 full

Section Exam 1 - Question 1 full

Ratings:

4.0

(1)
|Views: 1,101|Likes:
Published by Peter

More info:

Published by: Peter on Jul 18, 2008
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

03/04/2013

pdf

text

original

 
Question 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.b. The price of a substitute good rises.c. Consumer incomes fall, and the good is normal.d. Consumer incomes fall, and the good is inferior.e. A medical report is published showing that this product is hazardous to your health.f. The price of the product rises.
Answer:a) Consumers expect that the price of the good will be higher in the future:Figure 1.A
At the present, the price of the good is P
1
. The case of this question is “c
onsumersexpect that the price of the good will be higher in the future
.” This means that
the P
1
willrise to P
2
(P
2
>P
1
). With the new price of P
2
, the Demand curve will shift to the right (fromD
1
to D
2
). From this cause, the equilibrium point will move from E
1
to E
2
. Equilibriumquantity will also increase from Q
1
to Q
2
.
b) The price of a substitute good rises:Figure 1.B
 
 In economics, one kind of good (or service) is said to be a substitute good for anotherkind in so far as the two kinds of goods can be consumed or used in place of oneanother in at least some of their possible uses. Classic examples of substitute goodsinclude margarine and butter, or petroleum and natural gas (used for heating orelectricity). The fact that one good is substitutable for another has immediate economicconsequences: insofar as one good can be substituted for another, the demand for thetwo kinds of good will be bound together by the fact that customers can trade off onegood for the other if it becomes advantageous to do so. Thus, an
increase 
in price forone kind of good (ceteris paribus) will result in an
increase 
in demand for its substitutegoods, and a
decrease 
in price (ceteris paribus, again) will result in a
decrease 
indemand for its substitutes. Thus, economists can predict that a spike in the cost of woodwill likely mean increased business for bricklayers, or that falling cellular phone rates willmean a fall-off in business for public pay phones. From all reasons above, the Demandcurve will shift to the right, from D
1
to D
2
. Equilibrium point will move from E
1
to E
2
.Market equilibrium price will be higher, moving from P
1
to P
2
. Equilibrium quantity willalso increase from Q
1
to Q
2
.
c. Consumer incomes fall, and the good is normal:Figure 1.C
 
 When consumer incomes fall, and the good is normal, demand for it will decrease. TheDemand curve will shift to the left, from D
1
to D
2
. Equilibrium point will move from E
1
toE
2
. Market equilibrium price will fall, moving from P
1
down to P
2
. Equilibrium quantity willalso decrease from Q
1
to Q
2
.
d) Consumer incomes fall, and the good is inferior:Figure 1.D
Compare with the case c, when the consumer incomes fall, they do not buy the normalor better goods with high price. However, they shift to buy inferior goods with lowerprice. Therefore, the demand for inferior good will increase. The Demand curve will shiftto the right, from D
1
to D
2
. Equilibrium point will move from E
1
to E
2
. Market equilibriumprice will rise, moving from P
1
to P
2
. Equilibrium quantity will also increase from Q1 toQ
2
.

Activity (7)

You've already reviewed this. Edit your review.
1 hundred reads
1 thousand reads
Mark Parent liked this
Dan Leung liked this
swcltguy liked this
ep076590 liked this
Carmen Price liked this

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->