Question

Consider the following scenarios. Think about how each scenario would affect the price of khaki pants.

A new technology reduces the time it takes to make a pair of khaki pants.

The price of the cloth used to make khaki pants falls.

The wage rate paid to garment workers increases.

The price of jeans increases.

People's incomes increase.

For each of the scenarios listed, draw a demand–supply graph and label the axes with the price and quantity of khaki pants. Next, for each scenario, draw the appropriate demand–supply curve. Compare the new demand curve or supply curve by drawing it on the same graph.

Within the same document, address the following questions below each graph:

Does this event change demand, supply, both, or neither?

Does this event increase or decrease demand and/or supply?

How does this change in demand and/or supply affect the equilibrium prices and quantity in the market? In other words, do they increase or decrease?

Find the new equilibrium and compare it with the original one in terms of equilibrium price and quantity. Do they increase or decrease?

Answer 1

The demand for good is an inverse relationship between price and quantity. The equation of the demand curve gives the quantity demanded as a function of price. The graphical relationship between price and quantity demanded is depicted by the demand curve. Any point on the demand curve shows the quantity consumer demands for any particular price. The inverse demand curve is represents price as a function of quantity.

The supply for good is the direct relationship between price and quantity. The equation of the supply curve gives the quantity supplied as a function of price. The graphical relationship between price and quantity supplied is depicted by the supply curve. Any point on the supply curve shows the quantity producers supply for any particular price. The inverse supply curve represents price as a function of quantity.

The equilibrium is the point at which the quantity demanded by the consumer equals the quantity supplied by the producers at a particular price. It is the point of intersection between demand and supply curve.