Question

Draw a graph representing the market supply and market demand for beer in a competitive market. Then, Describe and graph the effect of a decline in hops’ costs on the price and quantity of beer (direction).

i.Price - ___________

ii.Quantity - __________

Answer 1

The graph representing the market supply and market demand for beer in a competitive market has been drawn below.

The initial equilibrium point is E where supply(S) and demand (D) curve intersect.

But when the cost of hop decreases, it leads to more profit for the producer of hops, hence all producer starts producing more hops. It leads to increase in the supply of the hops, as a result of the supply curve of hops shifts rightward from S to S1. Hence it leads to decrease in the equilibrium point from E to E1. Also, the price decreases from P to P1 and equilibrium quantity increases from Q to Q1.

Hence new equilibrium price decreases from P to P1 and new equilibrium quantity increases from Q to Q1.

All this has been shown in the below diagram.