Assume that steak is a normal good. Several people have lost their job in the wake of the coming recession, leading to a loss in consumer incomes. Draw a supply and demand diagram. Also, write WHY the curve (or curves) is (are) shifting based on the shift factors for demand and supply. What is happening to the equilibrium price and quantity in each problem? Remember the concept of ceteris paribus.
According to your question, you want to know what happens to the
supply and demand curves when people lose their jobs and there is a
loss in consumer incomes. Ceteris paribus means that "all
else remains equal" while considering the problem constraints.
Therefore, we work with the assumption that only the factors given
in the problem affect the supply-demand diagram, and no other
external factor is to be considered.
Now, due to recession, many people lose their jobs, reducing
incomes. In this case, the decrease in income would lead to a lower
quantity of goods demanded, and the original demand curve
D0 would shift left to D2. The shift
from D0 to D2 represents such a decrease in
demand: At any given price level, the quantity demanded is now
lower. We can see this in the graph.
When a demand curve shifts, it does not mean that the quantity
demanded by every individual buyer changes by the same amount.
Rather, it encapsulates the general trends of the market as a
whole.
Now, what happens to the supply curve? Note that, the supply curve
shifts under the following conditions:
1. Favourable/poor natural conditions
2. Fall/rise in input prices
3. Technology
4. Taxes
In this case, assuming ceteris paribus, we know that loss
of jobs will not affect the supply curve. Thus, the demand curve
will shift on the supply curve, resulting in lower equilibrium
price and quantity.
If, ceteris paribus is not mentioned, we can assume that
the recession led to a rise in input prices, in which case, the
supply curve also shifts to the left. Hope this helps!
Assume that steak is a normal good. Several people have lost their job in the wake...
Assume that bologna is an inferior good. Suppose consumer incomes are declining due to the recession, and, at the same time, firms are seeing an increase in the production costs of producing this lunch meat. Draw a supply and demand diagram. Also, write WHY the curve (or curves) is (are) shifting based on the shift factors for demand and supply. What is happening to the equilibrium price and quantity? Remember the concept of ceteris paribus.
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