Question

4) In each of the following situations, list what will happen to the equilibrium price and the equilibrium quantity for a particular product, which is an inferior good. a. The population decreases and productivity increases b. Income increases and the price of inputs increase c. The number of firms in the market decreases and income decreases d. Consumer preference decreases and the price of a complement increases e. The price of a substitute in consumption increases and the price of a substitute in production increases

Answer 1

(a) Lower population will decrease demand, shifting demand curve leftward, decreasing both price and quantity. Higher productivity will increase supply, shifting supply curve rightward, decreasing price and increasing quantity. The net effect is a definite decrease in price. But quantity will be higher, lower or unchanged depending on whether rightward shift in supply curve is higher than, lower than or equal in magnitude to the leftward shift in demand curve.

(b) Higher income will decrease demand (for inferior good), shifting demand curve leftward, decreasing both price and quantity. Higher input price will decrease supply, shifting supply curve leftward, increasing price and decreasing quantity. The net effect is a definite decrease in quantity. But price will be higher, lower or unchanged depending on whether leftward shift in supply curve is higher than, lower than or equal in magnitude to the leftward shift in demand curve.

(c) Decrease in income will increase demand (for inferior good), shifting demand curve rightward, increasing both price and quantity. Lower number of firms will decrease supply, shifting supply curve leftward, increasing price and decreasing quantity. The net effect is a definite increase in price. But quantity will be higher, lower or unchanged depending on whether rightward shift in demand curve is higher than, lower than or equal in magnitude to the leftward shift in supply curve.

(d) Decrease in consumer preference will decrease demand, shifting demand curve leftward, decreasing both price and quantity. Higher price of complement will also decrease demand, shifting demand curve leftward, decreasing both price and quantity. The net effect is a definite decrease in price and a definite decrease in quantity.

NOTE: As per Answering Policy, 1st 4 parts are answered.