Question

Assume in a simple example that two things occur simultaneously in an economy which produces “Good X”. This first thing affects consumer preferences and will decrease consumer preferences for “Good X” in the economy. The second thing is a natural disaster which causes the cost of inputs used to produce “Good X” to increase. Assume that this is a competitive market and that “Good X” is a normal good, what will happen to the equilibrium price and quantity of “Good X”? Use supply and demand analysis to demonstrate your answer and be sure to provide the rationale behind what is happening and also discuss any interesting observations or outcomes. (Note: The magnitudes of any supply and/or demand shifts in this example are not specified; you may want to consider all possible scenarios).

Need a 2 page answer please with graph

Answer 1

A decrease in consumer preference will shift the demand curve leftwards and an increase in costs will shift the supply curve leftwards resulting in a lower equilibrium quantity. However, the equilibrium price may be higher, lower or will remain unchanged depemding upon the magnitude of shift of the demand and supply curves.

For instance, if the demand curve shifts more than the supply curve, equilibrium.prices will fall. And if the demand curve shifts less in magnitude than the supply curve, equilibrium.prices will rise.