Question

HOMEWORK ASSIGNMENT 1. CHAPTER 3 (MAIN BODY OF THE TEXT NOT THE APPENDIX) EXERCISES DISCUSSION QUESTIONS: 1, 2, 3, 5, 6 REVIEW QUESTIONS: 1, 2, 3, 4, 5, 7, 8, 9 PROBLEMS 3, 4 II. PROBLEMS BASED ON LECTURE NOTES: (1) As you SAW, STARTING FROM THE EQUILIBRIUM POSITION, WHEN THE MARKET DEMAND CURVE SHIFTS TO THE RIGHT OR TO THE LEFT THE EQUILIBRIUM PRICE AND THE EQUILIBRIUM QUANTITY MOVE IN THE SAME DIRECTION. (THAT IS THEY BOTH EITHER INCREASE OR DECREASE). ON THE OTHER HAND WHEN THE MARKET SUPPLY CURVE SHIFTS EITHER TO THE RIGHT OR TO THE LEFT THE EQUILIBRIUM PRICES AND QUANTITY MOVE IN OPPOSITE DIRECTIONS. (THAT IS ONE OF THEM INCREASES WHILE THE OTHER DECREASES) HOW CAN THESE RESULTS BE JUSTIFIED? EXPLAININ DETAIL.

Answer 1

Ans) Explanation of :

Shift in Demand Curve:

When consumers desire to buy more ( or less) at any given price, the demand increases ( or decreases) and hence the demand curve shifts to the right ( or left). This shift indicates that the quantity of the good demanded is higher ( or lower) at every price. The increase ( or decrease) in demand causes the equilibrium price to rise ( or fall). When the price rises ( or falls), the quantity supplied rises ( or falls). This increase ( or decrease) in quantity supplied is represented by the movement along the supply curve. Hence when the market demand curve shifts to the right or left, the equilibrium price and the equilibrium quantity move in the same direction.

Shift in Supply Curve:

When at every price, the total amount that firms are willing and able to sell is reduced (or increased), the supply curve shifts to the left ( or right). The decrease (or increase) in supply of the good decreases (or increases) its quantity sold which causes the equilibrium quantity to fall (or rise). When the quantity supplied falls(or rises), the price of the good rises (or falls). Hence when the market supply curve shifts to the right or left, the equilibrium price and the equilibrium quantity move in the opposite direction.