Question

Supply and Demand Practice Exercises In each of the following instances, illustrate (and label) the initial equilibrium position (price and quantity exchanged) for the specified market. And then illustrate and label the new equilibrium price and quantity exchanged. 1. Product N is a normal good. Now there is a 2. Goods G and H are consumer substitute goods. Now the price of good H rises substantially. Analyze the impact on G (that is, G's new price and sales) 3. Good Z is produced through a highly labor intensive process. Now the United Z-makers Union negotiates a 20% wage increase for its workers. what will happen to the price of Z and to the level of sales? 4. Goods B and D are seller substitute goods. Now the price of good D falls. Illustrate the effects on good B. 5. Consumers of good R hear (from usually reliable sources) that the price of good R is about to increase sharply. Illustrate the likely effects on the price and quantity exchanged.

Answer 1

In each graph, D0 and S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0.

(1)

Decrease in consumer income will decrease the demand for a normal good, shifting its demand curve leftward to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

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(2)

Higher price of a substitute good will increase the demand for a good, shifting its demand curve rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(3)

Higher cost of wages will increase production cost, which will decrease the supply of the good, shifting its supply curve leftward to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

(4)

Lower price of a substitute good will decrease the demand for a good, shifting its demand curve leftward to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(5)

Expected increase in future price will increase the current demand for a good, shifting its demand curve rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.