Question

PROBLEM #8 For the changes presented in each section below, indicate what happens to demand or supply, and to equilibrium quantity and price, for the indicated product. Assume that only one side of the market is affected by the change (supply or demand). Illustrate each answer with supply-and-demand graphical analysis. The price of cotton, an input in the production of shirts starships, falls. Demonstrate the impact of this change on the market for shirts. In the 1920s, Henry Ford patented his assembly line, which allowed Ford Motor Company to manufacture more cars more efficiently than ever before. Show what effect this had on the market for cars. c. During the Plague of Justinian, Constantinople's population fell by 40%. Show what effect this had on the market for wine in the city. d. In the early 1900s, Upton Sinclair shocked consumers by publishing The Jungle, which described the unsanitary and inhumane conditions that prevailed in Chicago's meatpacking districts. Show what effect this might have had on the market for sausages.

Answer 1

In each graph, D0 and S0 represent initial demand and supply curve, intersecting at point A. Initial equilibrium price is P0 and quantity is Q0.

(a)

Lower input price will reduce production cost, which will increase market supply. Higher supply shifts supply curve rightward, decreasing price and increasing quantity. In following graph, S0 shifts right to S1, intersecting D0 at point B with lower price P1 and higher quantity Q1.

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(b)

Efficient manufacturing will reduce production cost, which will increase market supply. Higher supply shifts supply curve rightward, decreasing price and increasing quantity. In following graph, S0 shifts right to S1, intersecting D0 at point B with lower price P1 and higher quantity Q1.

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(c)

Decrease in population will decrease the market demand. 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)

Negative report about production process will shift consumer preference from sausages, which will decrease its market demand. 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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(e)

Lower price of sugar, a substitute in consumption, will decrease the demand for molasses. 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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(f)

Higher expected price will increase current demand of stock, shifting its 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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