Question

Because of a shift in consumer tastes, the market demand curve for good quality beer has shifted steadily to the right. If the market supply curve has remaind fixed (and is upward sloping to the right) there has been an increase over time in both the price of such beer and the quantity sold.

a. If one were to plot price against quantity sold would the resulting relationship approximate the market demand curve? If not what is it showing?

b. If you were going to estimate a model of demand for this beer, what factors and relevant variables would you look to include?

Answer 1

a. In this case, demand for beer has shifted to right due to a factor called taste and preferences. As shown in the graph below, demand shifts right from D1 to D2, the price goes up from p1 to p2 and as price increases, the supply is extended from point a to point b. Quantity traded goes up from Q1 to Q2. Hence, relationship can be shown on the graph.

b.While estimating demand for this beer, factors and variables to be considered are:

I. Availibility of substitutes for this beer:

ii. Income of people domestically and abroad (if this beer is exported)

iii. Population interested in buying this product.

iv. Change in the price of related goods like preferred snack with beer.