Question

Firm Utopia is producing a good Y which is a normal good. Use clearly labeled Demand and Supply curves, to show and explain what will happen to the equilibrium price and quantity of good Y in each of the following situations?

(a)        Due to an expansion, there is an increase in income to the consumers who buy good Y.

(b)       The cost of X which is a major ingredient in producing Y increases significantly.

(c)        Utopia buys improved machinery that reduces the cost of producing Y.

(d)       Good Z, a major rival of Y decreases its price.

(e)        Situations (a) and (b) occur at the same time.

Answer 1

A.

In the given scenario, equilibrium price and quantity of good Y increases both at the new equilibrium as demand curve shifts to the right.

B.

Increase in cost of production is going to decrease supply and supply curve shifts to the left. It increases price and decreases output at the new equilibrium.

C

New technology causes cost of production to decrease and supply curve shifts to the right. It decreases price and increases output.

D.

decrease in price of rival goods, makes more consumers shift to that goods, and it causes demand curve of good Y to shifts to the left. It makes equilibrium price and quantity of good Y to decrease at the new equilibrium.

E.

In this scenario, price is going to increase for sure at the new equilibrium. But, if decrease in supply is more than increase in demand, as shown in figure - E-1, then equilibrium quantity decreases. But, if decrease in supply is less than increase in demand, as shown in figure - E-2, then equilibrium quantity increases.