Question

2. Consider the market for cinnamon. a) Draw a supply and demand model that reflects that this market is in equilibrium at s.3 an ournce and I million ounces. To receive credit, fully label all axes and functions, as well as the market eunibium price and quantity. IO points) new harvesting technique allows for much cheaper production of cinnamon. At the same time. b) A cinnamon rolls are getting more and more popular around the world. Draw the impact of these two changes in the (same) supply and demand model and indicate the new equilibrium quantity supplied and demanded in this market. Make sure to clearly label all axes and functions. Explain in words your prediction for the shift(s) of supply and/or demand and impact on the equilibrium price and quantity. (20 points)

Answer 1

Ans. 2

Ans.2 (b) A new harvesting technique allows for much cheaper production of cinnamon and it leads to an increase in the supply of cinnamon and supply curve will shift downward.  

At the same time, cinnamon rolls are getting more and more popular around the world. due to the increase in the preferences for cinnamon, demand for cinnamon will increase and demand curve will shift rightward.

Equilibrium quantity will increase but change in price will depend upon the magnitude of the shift in supply and demand curve of cinnamon.

Three ways of change in price

1) If a shift in supply curve higher than the shift of the demand curve, the equilibrium price will fall.

2) If a shift in supply curve less than the demand curve, the equilibrium price will increase.

3) If a shift in supply curve equals to shift in demand curve, the equilibrium price will remain the same.

up Demand 2 $3 Demand l Demand