Question

Use the 4-Step Approach to analyze the effects on the Kraff Dinner (an inferior good) market of the following conditions: Suppose there was a strike by Kraff workers at the same time as an increase in the price of Ramen noodles (also an inferior good). Write the 4-Step Approach in the text box below.

Answer 1

Step 1: Initial situation

In following graphs, D0 and S0 are initial demand and supply curves of Kraft Dinner, intersecting at point A with initial equilibrium price P0 and quantity Q0.

Step 2: Demand or Supply affected?

Increse in price of Ramen noodle, a substitute to Kraft, will increase the demand for Kraft. Simultaneously, worker strike will decrease the supply of Kraft.

Step 3: Which curve shifts in which direction?

Increase in demand will shift demand curve rightward, increasing both price and quantity. Simultaneously, decrease in supply will shift supply curve leftward, increasing price and decreasing quantity. The net effect is a definite increase in price. But quantity may increase, decrease or remain unchanged depending on relative shift in demand and supply curve, and three possible situations come up, shown in next step.

Step 4: Final effects

(Situation a) Rightward shift in demand is more than the leftward shift in supply: Quantity increases, Price increases

In following graph, D0 shifts right to D1 and S0 shifts left to S1, intersecting at point B with higher price P1 and higher quantity Q1.

(Situation b) Rightward shift in demand is less than the leftward shift in supply: Quantity decreases, Price increases

In following graph, D0 shifts right to D1 and S0 shifts left to S1, intersecting at point B with higher price P1 and lower quantity Q1.

(Situation c) Rightward shift in demand is equal to the leftward shift in supply: Quantity stay the same, Price increases

In following graph, D0 shifts right to D1 and S0 shifts left to S1, intersecting at point B with higher price P1 and same quantity Q0.