Question

Problem 1:
a.) In a diagram, demonstrate how a change in price results in a change in quantity demanded. Be sure to label each part of your graph.

b.) In a diagram, demonstrate how a change in price results in a change in quantity supplied. Be sure to label each part of your graph.

c.) Evaluate: A decrease in the price of a good will result in an increase in demand and a decrease in supply for that good today, ceteris paribus.

Answer 1

Demand curve Q1 Q2 As it can be seen in the graph above, a fall in price from P1 to P2 leads to a movement along the demand curve, leading to an increase in quantity demanded of the good from Q1 to Q2 Thus, any change in price of a good will lead to movement along the same demand curve, in the opposite direction.

-Supply curve Q1 Q2 As it can be seen in the graph above, an increase in price from P1 to P2 leads to a movement along the supply curve, leading to an increase in quantity demanded of the good from Q1 to Q2 Thus, any change in price of a good will lead to movement along the supply curve, in the same direction. The given statement is FALSE This is because a decrease in the price of a good will lead to a downward movement along the demand curve and the supply curve. This will lead to an increase in quantity demanded of the good and a decrease in quantity supplied of the good. The demand and supply curves shift only when there is a change in market dynamics due to factors except for price change.