Question

3. Changes in government rules have caused consumers to increase their exercise, causing new demand for sneakers. At the same time, production methods have improved and allowed suppliers to make more sneakers. Draw the demand and supply curve showing the influence of these changes. What will happen to Price and Quantity as a result? _____ Price _____ Quantity

Answer 1

The consumers are demanding more sneakers due to change in government rules. This would lead to shift of the demand curve to the right as the demand for sneakers has increase. Note that, if prices would change then there would have been movement on the same demand curve. But in this question, demand curve itself shifts to the right. In figure 1, demand curve shifts from D1 to D2.

As the production methods have improved, suppliers have now started to make more sneaker. This would shift the supply curve of sneakers to the right as the supply has now increased. In figure 1, supply curve shifts from S1 to S2.

So, both demand and supply curve shift to the right. The changes are shown in figure 1 below.

Figure 1

Then, what would be the change in Price and Quantity as a result? This is difficult to say. Since people are demanding more sneaker and firms are supplying more sneaker, the quantity of sneaker would definitely increase. But the movement in price is not that certain. Three cases would arise:

1) When the change in demand of sneakers is more as compared to the change in supply of sneakers. Let’s say the firm take some time in order to improve their technology but the demand of sneakers has already increased, this would mean that the price of sneaker would rise (as seen in figure 2).

Figure 2

2) When the change in demand of sneaker is exactly matched by the change in supply of sneakers. This indicates whatever the amount of sneakers people are demanding, it is met by the firms. The price would not rise in such a case(as seen in figure 3).

Figure 3

3) When the change in demand of sneaker is less as compared to the change in supply of sneakers. This may arise when, say firm were already prepared for the rise in demand and before the demand could increase fully, the supply was more. The price would fall in such a case(as seen in figure 4).

Figure 4

Therefore, the quanitity of sneakers would increase but the price of sneakers can increase, decrease or remain constant.