Question

(3)Use appropriate graphical illustrations to show how each of the following affects the equilibrium price and the equilibrium quantity in the market for commodity Z. Explain each diagram. (a)A favorable shift in consumer preferences for this product. (b) A significant increase in the minimum real wage paid for the use of labor resources. (c)A fall in the price of commodity Y considered to be a substitute for commodity Z. (d)A severe weather condition that negatively impacts the production and the supply of commodity Z.

Answer 1

In the graphs, D0 and S0 represent initial demand and supply curves, intersecting at point A. Initial equilibrium price is P0 and quantity is Q0.

(a) Favorable consumer preference will increase the demand for Z. Increase in demand shifts demand curve rightward, increasing both price and quantity. In following graph, D0 shifts right to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

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(b) Increase in minimum wage will increase production cost, which will decrease market supply of Z. Decrease in supply shifts supply curve leftward, increasing price and decreasing quantity. In following graph, S0 shifts left to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

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(c) Decrease in price of substitute will decrease demand for Z. Lower demand shifts demand curve leftward, decreasing both price and quantity. In following graph, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

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(d) Negatively impacted production will decrease market supply of Z. Decrease in supply shifts supply curve leftward, increasing price and decreasing quantity. In following graph, S0 shifts left to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

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