Question

For each event below, explain if demand or supply would shift and in what direction. What would the effect be on equilibrium price and quantity? Be succinct in your answers (15 points)

1. The price of a substitute good (in consumption) decreases.
2. Government regulators decide to outlaw a cost-reducing technological process in order to protect the environment.
3. The price of a complement good (in production) increases.
4. The price of inputs used to produce the good decrease.
5. Consumers expect that the price of the good will fall in the near future.

Answer 1

A) when there is a decline in the price of a substitute good, consumers are able to purchase more of it and demand less of the other good. this decreases the demand for the other good and the demand curve shifts to the left. New equilibrium price and new equilibrium quantity both are reduced

B) introduction of a cost reducing technology is expected to increase production which indicates that the supply will increase. The supply curve shifts to the right and the new equilibrium price is reduced. However the new equilibrium quantity is increased.

C) when there is an increase in the price of a complement then it is less purchased. Due to this, the demand for the other good decreases and demand curve shifts to the left. The new equilibrium price and quantity both are reduced.

D) when there is a reduction in the price of input, cost of production will reduce and this will increase the supply of the product. the supply curve will shift to the right and the new equilibrium price will be lower while the new equilibrium quantity will be higher.

E) when consumers are expecting the price to be falling in future they will demand less in the present time. This decreases the demand for the product and shifts the demand curve to the left. The price level will fall and the quantity will fall at the new equilibrium.