Question

Consider the market for orange juice. Draw a correctly labeled set of axes. Draw a market supply curve and a market demand curve. On the axes, label the equilibrium price P₀ and the equilibrium quantity Q₀. A new study is released that states folic acid in orange juice reduces the risk of cancer, Show what happens to the demand curve or the supply curve for orange juice . On the axes, label the new equilibrium price P₁ and the new equilibrium quantity Q₁. Explain how the equilibrium price and quantity changed.

Answer 1

Solution:

Marking the price of orange juice, P, on vertical axis, and quantity of orange juice on the horizontal axis. As the price of the juice increases, the sellers/suppliers would like to sell more orange juice in order to increase their profits, hence there is a positive relation between the quantity supplied of juice and the price of juice (so upward sloping supply curve). Similarly, as the price of the juice increases, the consumers would consume less orange juice as it becomes costlier, hence there is a negative relation between the quantity demanded of juice and the price of juice (so downward sloping demand curve). Market equilibrium occurs where the two curves intersect, such that at a price level, what all is supplied by the sellers is being demanded by the buyers. Accordingly, following is the required graph (point E is market to denote the market equilibrium):

Now, that a study has told that the folic acid is found in orange juice, which reduces the risk of cancer, clearly the people consuming it will want to make use of this health benefit. So, this will affect the demand side in market, and not the supply side. Further, this is external factor from price (simply new found benefit of orange juice), so there will be shift in the demand curve, and not movement along the demand curve. Finally, since it is advantageous to drink orange juice, one shall expect that the consumers will demand more juice now, so the demand curve will shift to the right, parallely. Given such change we will have the following new graph (new equilibrium point is marked as E'):