Question

Using supply-and-demand diagrams, show the effect of the following events on the market for Pickles. Comment on what happens to the equilibrium price and quantity

Answer 1

Case 1: It is given that half of the population has suddenly become allergic to cucumbers. This is equivalent to an exogenous shock to the demand for cucumbers. As a result of this, the demand curve of pickles will shift downward to the left, as demand for pickles will decline for a given price level. It is shown in the following diagram as the downward shift of the demand curve from D1 to D2. The decline in the demand will cause, equilibrium price to decline from p1 to p2 and equilibrium quantity to decline from q1 to q2. The supply curve will not change.

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Case 2: It is given that the government has removed tariffs on cucumber imports. This is equivalent to a positive exogenous shock, which will raise the level of supply of cucumbers in the economy for a given price level. As a result of this, the supply curve will shift rightward from S1 to S2 as shown in the following diagram. The increase in the supply will cause, equilibrium price to decline from p1 to p2 and equilibrium quantity to increase from q1 to q2. The demand curve will not change.

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