Question

Example: Consumers have more income and tea is a normal good. (This is a change in demand. It will increase demand or shift it to the right. This will lead to an increase in the equilibrium quantity and an increase in the equilibrium price.)

a. Severe weather wreaks havoc with the tea crop.

b. A medical report implying tea is bad for your health is published.

c. A technological innovation lowers the cost of producing tea.

d. Consumers incomes falls (Assume tea is a normal good.)

Answer 1

a)

This is a change in supply. The bad weather causes a shift in the supply curve to the left ( decrease). The equilibrium price of tea will increase and quantity will fall.

b)

This is a change in demand. The demand curve shifts to the left ( falls). The equilibrium price and quantity of tea will fall.

c) This is change in the supply. Due to technological innovation, the cost of production of tea will fall. The supply curve shifts to the right. The equilibrium price of tea will fall and quantity will increase.

d)

This is a change in demand. The demand curve shifts to the left ( falls). The equilibrium price and quantity of tea will fall. Normal good means that if income falls demand falls and if income increases, demand increases.