Question

Draw a supply and demand diagram for each problem. Also, write WHY the curve (or curves) is (are) shifting based on the shift factors for demand and supply. What is happening to the equilibrium price and quantity in each problem? Treat each problem separately and always remember the concept of ceteris paribus.

2. Assume that soup is an inferior good. Several people have lost their job in the wake of the coming recession, leading to a loss in consumer incomes. At the same time, there is a decrease in the number of producers of soup.

Answer 1

Q.

Assume that soup is an inferior good. Several people have lost their job in the wake of the coming recession, leading to a loss in consumer incomes. At the same time, there is a decrease in the number of producers of soup.

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Due to the loss in incomes of consumers, their purchasing power falls. Since soup is an inferior good, a fall in income leads to a rise in demand for soup. Thus, the demand curve shifts to the right.

Due to lower production of soup, there is a fall in supply, and the supply curve shifts to the left.

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If Demand and Supply shift by exactly the same amount, there will be a rise in price, and quantity will remain unchanged. This is shown in the above diagram.

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If Demand rightward shift is greater than Supply leftward shift, there will be a rise in price, and quantity will also rise.

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If Supply leftward shift is greater than Demand rightward shift, there will be a rise in price, and quantity will fall.