Question

Identify what determinant changes and explain how the equilibrium price and equilibrium quantity in a purely competitive market will change given the following situations. Draw the appropriate demand and supply curves showing the change. (Each graph should have an equilibrium point before the impact as well as after; be sure to label all parts of the graphs).

a. Product: oranges – A winter storm freezes 50 % of the fruit on the trees in Florida

b. Product: avocados- A tariff is imposed on the importation of avocados from Mexico while demand remains the same.

c. Product: donuts – consumers desire for donuts decreases and the cost of flour (used to make donuts) increases

Answer 1

1. When winter storms freeze 50% oranges know trees, the supply of oranges falls from S to S1( a backward shift). In the above graph E is the initial equilibrium point where Q quantity demanded at P price. That falls from Q1 and price increases from P1 where new equilibrium point is established at E1.

2. In the case of avocado, when tariff imposed the importation may falls because of the price may shoot up. The demand remains the same. So that initial price and quantities are P and Q which is in equilibrium at point E . When supply decrease due to tariff imposition, price goes up to P1 and quantity decreases from Q to Q1. A new equilibrium is established at E2.

3. initial equilibrium point is E 1 where equilibrium price ND quantity are P and Q respectively. Donuts consumption decreases so the demand curve shifts from D to D1( backward shift) and a new equilibrium is established at E2. price falls from P to P1 and output falls from Q to Q 1...At the same time cost of flour increases. so the supply falls from S to S1( backward shift). A new equilibrium point is established at E3 where P* and Q* are price and quantity respectively.