Question

PROBLEMS ON DEMAND AND SUPPLY

Use demand and supply analysis to answer each of the following questions. Assume that the respective market is in equilibrium before the change takes place. Graphically analyze whether there is a movement or a shift in the appropriate curve and then determine the effect on the equilibrium price and quantity. Draw a separate diagram for each question in each market.

1. In the wheat market:

1. A new fertilizer is developed with a lower cost

2. The government imposes a new tax on wheat farmers

3. The price of wheat decreases

4. An improved method of harvesting is introduced

2. In the gasoline market:

1. There is a rumor among producers of another oil embargo which will cause prices to go

   up.

2. An oil embargo actually takes place

3. In the cigarette market:

1. The government increases taxes

2. Cigarette prices decrease

4. In the bagel market:

1. The price of cream cheese goes down

2. A recent health report shows bagels to be higher in fat and therefore less healthy than

   bread

5. In the banana market:

1. The FDA announces research results which suggest that eating 5 lbs of bananas monthly

   increases IQ scores by an average of 10 points.

2. What happens in the market for other fruits?

6. In the wine market, the number of new suppliers increases simultaneously with a new law requiring signs to be posted stating the health risks to pregnant women.

7. In the housing market, inflation is growing at 20% per year while a number of builders go bankrupt.

8. In the market for college professors, college enrollments increase dramatically, while loans and grants for graduate work are cut by the government.

9. In the market for crisco, a government report links the use of crisco to blood pressure.

10. In the market for mink coats:

1. Fox coats increase in price

2. The price of mink coats decreases

3. The economy goes into severe recession causing several people to be laid off.

4. The price of mink food increases.

Answer 1

1. Wheat Market:

a) New fertilizer at lower cost increases supply of wheat. This shifts supply curve rightwards causing decrease in equilibrium price and increase in equilibrium quantity.

b) Tax decreases supply of wheat in the market. This shifts supply curve leftwards causing increase in equilibrium price and decrease in equilibrium quantity.

c) Decrease in the price of wheat causes movement of demand curve rather than shift. It causes downward movement of demand curve.

Equilibrium price decreases while quantity rises.

d) Improvement in the method of harvesting increases supply of wheat which shifts supply curve rightwards causing increase in equilibrium quantity and decrease in equilibrium price.