Question

During the month of February Hallmark announced that there is a shortage for romantic greeting cards due to a delivery problem. Draw and the graph and explain which curve shift first and, then what cause the second curve to shift. Final what happens to price and quantity at the nee equilibrium point?

Answer 1

The first event is that time in question is February where demand for romantic greeting card increases due to Valentines Day. Higher demand will shift the demand curve rightward first, increasing both price and quantity. Hallmark's announcement will decrease supply, shifting supply curve leftward, increasing price and decreasing quantity. The net effect is a increase in price, while quantity may rise, fall or stay the same on basis of whether leftward shift in supply curve is lower than, higher than or equal in magnitude to the rightward shift in demand curve.

In following graph, D0 & S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0. As S0 shifts left to S1 & D0 shifts right to D1, they intersect at point B with higher price P1 and quantity Q1. Since in the graph, leftward shift in supply curve is lower in magnitude to the rightward shift in demand curve, Q1 is higher than Q0.