Question

 

2.2      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

In each graph, price (P) and quantity (Q) of apples are measured vertically and horizontally respectively. D0 & S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0.

(2.2.1) An increase in wage rate will increase the cost of inputs which will decrease the supply of apples. Lower supply will shift the supply curve leftward, increasing price and decreasing quantity. In following graph, as S0 shifts left to S1, it intersects D0 at point B with higher price P1 and lower quantity Q1.

(2.2.2) A decrease in fertilizer price will decrease the cost of inputs which will increase the supply of apples. Higher supply will shift the supply curve rightward, decreasing price and increasing quantity. At the same time, higher demand will shift the demand curve rightward, increasing both price and quantity. The net effect is a definite increase in quantity, but price may rise, fall or remain unchanged based on relative shift in demand and supply curves. In following graph, as D0 shifts right to D1 and S0 shifts right to S1, they intersect at point B with higher quantity Q1 and new price P1, which is higher than P0 by drawing.