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 P1. The case of this question is “consumers expect that the price of the good will be higher in the future.” This means that the P1 will rise to P2 (P2>P1). With the new price of P2, the Demand curve will shift to the right (from D1 to D2). From this cause, the equilibrium point will move from E1 to E2. Equilibrium quantity will also increase from Q1 to Q2. 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 another kind in so far as the two kinds of goods can be consumed or used in place of one another in at least some of their possible uses. Classic examples of substitute goods include margarine and butter, or petroleum and natural gas (used for heating or electricity). The fact that one good is substitutable for another has immediate economic consequences: insofar as one good can be substituted for another, the demand for the two kinds of good will be bound together by the fact that customers can trade off one good for the other if it becomes advantageous to do so. Thus, an increase in price for one kind of good (ceteris paribus) will result in an increase in demand for its substitute goods, and a decrease in price (ceteris paribus, again) will result in a decrease in demand for its substitutes. Thus, economists can predict that a spike in the cost of wood will likely mean increased business for bricklayers, or that falling cellular phone rates will mean a fall-off in business for public pay phones. From all reasons above, the Demand curve will shift to the right, from D1 to D2. Equilibrium point will move from E1 to E2. Market equilibrium price will be higher, moving from P1 to P2. Equilibrium quantity will also increase from Q1 to Q2. 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. The Demand curve will shift to the left, from D1 to D2. Equilibrium point will move from E1 to E2. Market equilibrium price will fall, moving from P1 down to P2. Equilibrium quantity will also decrease from Q1 to Q2. 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 normal or better goods with high price. However, they shift to buy inferior goods with lower price. Therefore, the demand for inferior good will increase. The Demand curve will shift to the right, from D1 to D2. Equilibrium point will move from E1 to E2. Market equilibrium price will rise, moving from P1 to P2. Equilibrium quantity will also increase from Q1 to Q2.

e) A medical report is published showing that this product is hazardous to your health: Figure 1.E

With this bad news, consumers will be worried of using medicines to protect their health. They will choose another way to save their live such as improving their meals, using substitutions of medical products, doing exercises every morning, etc. therefore, the demand for this product will do down. The Demand curve will shift to the left, from D1 to D2. Equilibrium point will move from E1 to E2. Market equilibrium price will fall, moving from P1 down to P2. Equilibrium quantity will also decrease from Q1 to Q2. f) The price of the product rises: Figure 1.F

When the price of the product rises from P1 to P2 (P2>P1), Demand Curve will not shift, but it creates a movement along the Demand curve (from E 1 to E2) (Paul G. Keat, Philip K. Y. Young, 2006, p. 51). Market equilibrium price will be higher, moving from P 1 to P2. Since price increases, equilibrium quantity will decrease from Q 1 to Q2. Reference: Paul G. Keat, Philip K. Y. Young. (2006). Managerial Economics: Economic Tools for Today's Decision Makers (5 ed.). Upper Saddle River, New Jersey, 07458, USA: Pearson Education, Inc.

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