Question

Consider the market for cotton shirts which, oddly enough, are made from cotton. Cotton shirts and silk shirts are substitutes in consumption and silk shirts are made from, you guessed it, silk. You have 4 markets: Cotton, Cotton Shirts, Silk and Silk Shirts. In each of the following cases determine what happens to price and output in each of the markets.

a) Severe weather conditions cause a reduction in cotton production

b) A new treaty allows for increased imports of silk.

c) Medical reports determine that synthetic shirts (substitutes for Silk and Cotton Shirts) may cause cancer

d) A new advertising campaign increases preferences for cotton shirts.

Answer 1

ans-a) Severe weather cause a reduction in cotton production.

	MARKETS
Effect on	Cotton	Cotton Shirt	Silk	Silk Shirt
PRICE	INCREASE(due to decrease in supply which will create shortage of cotton)	INCREASE (due to increase in price of raw material and its shortage)	INCREASE (due to high demand to fill gap of cotton)	INCREASE(due to increase in demand of silk shirts)
OUTPUT	DECREASE (less supply)	DECREASE( less supply of raw material)	INCREASE(because consumers will switch to substitutes due to shortage of cotton)	INCREASE(BECAUSE CONSUMERS WILL SUBSTITUTE COTTON SHIRTS WITH SILK SHIRTS)

Ans-b) A new treaty allows more imports of silk -: means there is more supply of silk.

Effect	Cotton market	Cotton shirts market	Silk market	Silk shirts market
PRICE	DECREASE(due to decline in demand)	DECREASE(due to decline in price of raw material i.e. cotton)	DECREASE (due to more supply and easy availability)	DECREASE(due to fall in price of raw material i.e. silk)
OUTPUT	DECREASE(due to fall in demand as consumers are buying more silk shirts)	DECREASE	INCREASE(due to more supply)	INCREASE

Ans- c) Medical reports determine that synthetic shirts (substitutes of cotton and silk shirts) causes cancer -: This means that consumers will shift to cotton and silk shirts .

EFFECT	Cooton Market	Cotton shirts market	Silk market	Silk shirts market
PRICE	INCREASE(due to high demand and supply same)	INCREASE(due to high demand)	INCREASE(due to high demand)	INCREASE(due to high demand)
OUTPUT	INCREASE	INCREASE	INCTREASE	INCREASE

Ans-d) A new advertising campaign increases preferences for cotton shirts-: This means there will be less demand of silk and silk shirts.

EFFECT	Cotton market	Cotton Shirts market	sILK MARKET	Silk shirts market
PRICE	INCREASE(due to high demand)	INCREASE(owing to high demand)	DECREASE(due to fall in demand)	DECREASE(due to fall in demand)
OUTPUT	INCREASE(due to high demand of cotton shirts there is more demand for raw material i.e. cotton)	INCREASE(due to high preferences which increases the demand)	DECREASE(due to less demand aS BUYERS SWITCH TO COTTON SHIRTS)	DECREASE(due to less demand as buyers prefer cotton shirts more)