Question

There is a large earthquake in a city. Some roads are destroyed and people need more bottled water because pipelines are damaged.

Use supply and demand curve to show what happens to the price and quantity of the bottled water in this city. Show with graph and explain.

Answer 1

With the earthquake, the pipelines are damaged. It causes increase in the demand of water bottle and demand curve shifts to the right. At the same time, roads are also damaged, so supply of water, also decrease and it shifts to the left.

Hence, the price will increase for sure. But, quantity change will depend upon the degree of change in demand and supply.

In scenario 1, when increase in demand is more than decrease in supply, then quantity will increase at the new equilibrium.

In scenario 2, when increase in demand is less than decrease in supply, then quantity will decrease at the new equilibrium.