Question

In: Economics

Using diagrams, show what changes in price and quantity would be expected in the following markets...

Using diagrams, show what changes in price and quantity would be expected in the following markets under the scenarios given. Also say whether this represents a change in demand or a change in quantity demanded. (a) Natural Gas: Fracking technology is improved allowing easier access to natural gas reserves.

(b) Rice: Reports surface about traces of arsenic (a poison) in rice.

(c) Wheat (substitute to rice): Reports surface about traces of arsenic (a poison) in rice.

(d) Soy sauce (complement to rice): Reports surface about traces of arsenic (a poison) in rice. (e) Clothing: Labor costs for clothing manufacturers increase.

Solutions

Expert Solution

Answer:

In each graph, D0 & S0 are initial demand & supply curves intersecting at point A with price P0 and quantity Q0.

(a) Improved technology will lower the cost of production, leading to an increase in Supply. The supply curve shifts rightward. Note that easier access to natural gas reserves does not impact demand side.

In the graph, supply shifts right to S1, intersecting D0 at point B with lower price P1 and higher quantity Q1.

(b) Trace of arsenic in rice will decrease demand for rice. Demand curve shifts to left, from D0 to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(c) Trace of arsenic in rice will decrease demand for rice and increase demand for wheat. Demand for wheat curve will shift rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(d) Trace of arsenic in rice will decrease demand for rice and decrease demand for soy sauce. Demand for soy sauce curve will shift leftward to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(e) Higher labor cost will increase cost of production, which will lower supply (without affecting demand side). Supply curve will shift leftward to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

Rahul Sunny answered 2 years ago
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