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QUESTION ONE [20] For each of the following scenarios, explain the reason for the price change...

QUESTION ONE [20]

For each of the following scenarios, explain the reason for the price change as indicated. Use diagrams to motivate your answer.

1.1 The price of peaches decreases during its heaviest months of consumption (10)

1.2 The price of beachfront cottages increase during peak/festive season

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Answer #1

A) Fall in price of peach during its heaviest months of consumption must be due to rise in aggregate suply more than rise in aggregate demand which shifts aggregate supply curve of peach to its right from AS to AS1. It will reduce the price from P to P1 and output to rise from Y to Y1.

B) Price of beachfront rises during peak season due to rise in aggregate demand of it which shifts its aggregate demand curve to its right from AD to AD1 while aggregate supply remains the same. It will result in rise in price from P to P1 while output level rises from Y to Y1.

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