Question

Using well labelled diagrams, explain how the equilibrium price and equilibrium quantity of apples will change as a result of the following; 2.2.1 A change in the wages of farm workers from R150 per day to R200 per day. (10) 2.2.2 A decrease in the price of fertilizers and a concurrent increase in the demand for apple juice. (10)

Answer 1

ans...
2.2.1.
In case of an increase in wages of farm workers, the per unit cost of production of apples will increase. This will shift the supply for apples to the left. At previous equilibrium price there will be excess demand for apples. For market to clear, it must be the case that the market clearing price should increase. As a result, the new equilibrium price will be higher and the new quantity will be lower.

2.2.2

A decrease in price of fertilizers will reduce the per unit cost of production of Apples. This will shift the supply curve to the right.
However at the same time demand for apple juice also increase which will shift the demand curve to the right.

The new equilibrium quantity will be higher than before as can be seen in the below diagram. However, the effect on price level will depend on the extent of shift of demand curve-

1. If extent of shift of demand curve is same as supply curve then the new equilibrium price will not change.

2. If extent of shift of demand curve is less than supply curve then the new equilibrium price will decrease.
3. If extent of shift of demand curve is greater than supply curve then the new equilibrium price will increase.