Question

In: Economics

5. Fabric is used to make dresses. If the price of fabric increases what is likely...

5. Fabric is used to make dresses. If the price of fabric increases what is likely to happen to the equilibrium price and quantity for dresses. If price stays the same would that be equilibrium? Why or why not? What will eventually happen in the market? What happens to equilibrium price and quantity? Which quantity is affected and how do you know? Illustrate using a graph.

6. Suppose that people expect that the price of computers will fall next month. At the same time a technological advance take place in the computer industry. What happens to equilibrium price and quantity? Illustrate using a graph.

Solutions

Expert Solution

5) If price of fabric increase and it is an input to make dress, it will result in rise in cost of production for dresses. It will induce producers to produce less of the dresses which will shift aggregate supply curve to its left from AS to AS1. It tends to raise price level from P to P1 and reduce output level from Y to Y1.

If price remains the same, market would not be in equilibrium because equilibrium will occur at a point whne new supply curve intersects demand curve.

6) If consumers expect price to fall new month, they will reduce their quantity demadee now and buy computers after one month when the price is down. It will shift aggregate demand to its left now from AD to AD1.

At the same time, producers will be able to produce more of the computers using same inputs which will raise aggregate supply of computers and shift supply curve to its right from SRAS to SRAS1.

Both of these factors combined reduces price level from P* to P2 and keep output level same at its initial level of Y*.


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