Question

For Problems 1 and 2, illustrate and explain (and label) the effects of the change in the determinant of demand or supply on the market equilibrium price and quantity, ceteris poribus (c. p.). For each change: • illustrate the effect on the demand or supply curve and clearly label the new curve (2 pts); . given the change in demand or supply, illustrate the quantity demanded, labeled as a', and the quantity supplied, labeled as Q', at the initial market equilibrium price, P.* (2 pts); • stote whether the change creates a surplus or a shortage at Po* and illustrate and labelit (1 pt); • illustrate the new equilibrium quantity and price and label them as Qu" and P.T. (1 pt); and, • explain the adjustment process to the new equilibrium (3 pts). 1. If the wages of auto production (assembly) workers increase, then in the new car market, c.p., So 2. Assume that socks and sweatshirts are independent in consumption and substitutes in production. If the price of sweatshirts decreases, then in the sock market, c.pi 000

Answer 1

Answer

1. If the wages of auto production (assembly) workers increase, then in the new car market, c.p. 000

• If the wages of auto production engineers increase, the average and thus total cost of production of auto will increase. The increase in production cost will decrease the total production of autos.As a result, the supply of new cars will decrease in car market.So the supply curve of cars will shift leftward. In the figure, the new supply curve of cars is shown by the supply curve 'S₁'.
• At the initial market equilibrium price P₀^*, we see that the quantity demanded for cars remains same at Q_D^* or Q_d but the quantity supplied decreases to Q_s.
• The decrease in quantity supply of cars creates a shortage of cars at the initial equilibrium price in the market to the amount of Q_sQ_d , shown as 'red straight line' in the figure.
• At this situation, the equilibrium price of cars will rise to P₁^*, and the equilibrium quantity of cars will decrease to Q₁^* in the market.
• When there emerges a shortage of supply of a good in the market, the suppliers of the good take this opportunity and as a result, the price of the good tends to rise. When the price of the good increases, the quantity demanded for the good decreases. The price of the good continues to rise until the market gets clear at the equilibrium price. When the quantity supply of the good equals the quantity demanded for the good, which is lower than before, the price stops to rise and settles at this level.Thus equilibrium price increases, and equilibrium quantity decreases.This is the adjustment process happened in the car market.

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2. Assume that socks and sweatshirts are independent in consumption and substitutes in production. If the price of sweatshirts decreases, then in the sock market, c. p. OS 10

• The socks and sweatshirts are substitutes in production. Thus when the price of sweatshirts decreases, the producer will produce less of sweatshirts, and will produce more of socks which in turn will increase the supply of socks. So in the socks market, the supply curve of socks will shift rightward. In the figure, it is shown as 'S₁'.
• At the initial market equilibrium price P₀^*, in the figure, we see that the quantity demanded for socks remains same at Q_D^* or Q_d but the quantity supplied of socks increases to Q_s.
• The increase in quantity supply of socks creates a surplus of socks at the initial equilibrium price in the market to the amount of Q_dQ_s , shown as 'blue straight line' in the figure.
• At this situation, the equilibrium price of socks will decrease to P₁^*, and the equilibrium quantity of socks will increase to Q₁^* in the market.
• When there emerges a surplus of a good in the market, there is a tendency of the price of the good to fall. When the price of the good decreases, the quantity demanded for the good increases. The price of the good continues to fall until the market gets clear at the equilibrium price. When the quantity demanded for the good equals the quantity supplied of the good, which is higher than before, the price stops to fall and settles at this level.Thus equilibrium price decreases, and equilibrium quantity increases when there is surplus in the market.This is the adjustment process happened in the socks market.

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The supply curve of cheese is shown by 'SS". The initial demand curve for cheese is shown by 'DD'. The increase in the demand for cheese shifts the demand curve for cheese rightward to D₁D₁. As a result the equilibrium price of the cheese rises to P₁^* , and the equilibrium quantity of cheese rises to Q₁^*.

3. Illustrate and explain the effects of an increase in the demand for cheese on the market equilibrium price and quantity of cheese, and then, illustrate and explain the resulting effects on the market equilibrium price and quantity of pizza in the pizza market. Given the change in demand or supply in each market, iflustrate both the quantity demanded, QC, and the quantity supplied, Q , and the shortage or surplus that develops at the initial equilibrium price. Illustrate the new equilibrium quantity and price and explain the adjustment process to the new equilibrium for each market. Assume that cheese is an input in pizza production. Cheese Mkt Pizza Mkt

In pizza market, the demand curve for pizza is shown by 'DD". The initial supply curve of pizza is shown by 'SS'. Cheese is an input in pizza production. The increase in the price of cheese increases the cost of production of pizza. As a result, the total production and supply of pizza will decrease. So the supply curve of pizza will shift leftward. In the figure, the new supply curve of pizza is shown as S₁S_1. As a result, the equilibrium price of pizza increases to P₁^* , and the equilibrium quantity of pizza decreases to Q₁^*.

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