Question

The following diagram shows the demand for and supply of apples. The supply and demand curves are initially given by SO and Do. The market is in equilibrium at point x. There is then a rise in the price of pears and oranges and an increase in the costs of transporting fresh fruit. As a result either or both the demand and supply curves shift to one of the new positions shown in the diagram. What will be the equilibrium position on the diagram? Price Quantity

Answer 1

In case of substituted goods a rise in price of one increases the demand for the other. For example the consumers can substitute pears or oranges in place of apple when the price of apple increases. In the same way the consumers can substitute apples in place of pears and oranges when their price increases. An increase in the price of pears and oranges increase the demand for apple. The demand curve of apple shift to rightward from D₀ to D₁. Similarly, the cost of transportation of fruits shifts the supply curve of apple to the left from S₀ to S₂. The new demand curve D1 intersect with the new supply curve S₂ at Point J. Then the new equilibrium point is J.