Question

2) A new fast food restaurant opens in your town. A new book is released at the same time that exposes the high calorie contents of fast food. 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 shift will be a rightward shift in supply curve for restaurants, caused by addition of a new restaurant in market which will increase market supply. The rightward shift in supply curve will decrease price and increase quantity. At the same time, a negative health report about fast food will decrease demand for fast food, shifting demand curve leftward. which will decrease price and decrease quantity. The net effect is a definite decrease in price. But quantity may be higher, lower or unchanged on basis of whether the rightward shift in supply curve is higher than, lower than or equal in magnitude compared to the leftward shift in demand curve.

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