Question

1. Suppose the U.S. economy moves out of a recession and incomes rise. What will happen to the equilibrium prices and quantities of normal goods? 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? Would your answer be the same if you were discussing inferior goods? Explain using supply/demand graphs.

2. Draw a graph showing the impact of students returning to campus in August on the market for pizza in a college town. 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? Explain using supply/demand graphs.

Answer 1

Sol 1) If U.S. economy moves out of recession and income rises,the demand for normal goods rises and demand curve will shift rightward. normal goods are those goods whose demand rises when income of consumer increases.

"The equilibrium price and equilibrium qty will increase in case of normal goods."

If price remains same ,the equilibrium can be achieved. since,economy moves out of recession the production will start increasing.This will increase supply of good in the market and supply curve will shift rightward .If proportionate change in demand = proportionate change in supply i.e both demand and supply shifts in equal proportion,equilibrium price remains constant and eq qty increases.Since no excess demand or excess supply will exist, so no change in equilibrium price.

If good is not normal but inferior means such good whose demand decreases when income of the consumer increases:

Demand will decrease and demand curve will shift leftward.The equilibrium price and qty in such case will decrease.

Sol 2) The impact of students returning to campus on the market for pizza:

This will increase demand for pizza and demand curve will shift rightward.If price remains same and supply remains unchanged,there will be problem of excess demand in the market and equilibrium can't be achieved . This will increase competition among buyers and they are ready to pay higher prices.Thus sellers will increase the price which causes contraction in demand(due to law of demand) and extension in supply (due to law of supply) .

"Thus,equilibrium price and equilibrium qty both will increase."

"FOR THIS DIAGRAM WILL BE SAME EXPLAINED IN FIRST CASE"