Question

In each of the following situations, list what will happen to the equilibrium price and the equilibrium quantity for a particular product, which is a normal good.

a. Price is expected to increase in the future.

b.The number of firms in the market increases and income increases.

c. The population increases and the price of inputs increase.

d.The price of a complement increases and technology advances.

e. Consumer preference increases and the price of a substitute in production decreases.

Answer 1

a) if price is expected to increase in future then the consumers would demand more to pile up the stocks today. This would lead to an increase in the demand of the product. This lead to an increase in the equilibrium price and the equilibrium quantity.

b) increase in the number of firms in the market leads to an increase in the supply. Increase in income leads to an increase in the demand for the good. The combined effect of both these events is that the the equilibrium quantity of the good would increase with certainty but the effect on equilibrium price is ambiguous. Whether the equilibrium price would increase or decrease or remains Constant, depends upon the relative strength of the increase in supply caused by Increase in the number of firms and the increase in demand caused by the Increase in income.

c) if the population increases then the demand for the product would increase. If the price of inputs increase then the supply of the the good decreases. Combined effect of both this events would be that equilibrium price would increase with certainty. But the effect on the equilibrium quantity is ambiguous. The equilibrium quantity may increase or decrease or may remain constant depending upon the relative strength of the increase in demand and the decrease in supply.

d) if the price of an complement increases then the demand for the good will decrease and if Technology advances then the supply of the good will increase. Combined effect of both these events is that the equilibrium price will decrease with certainty but the effect on the equilibrium quantity is ambiguous. Whether the equilibrium quantity will increase aur decrease or remain constant will depend upon the relative strength of decrease in demand and the increase in supply of the good.

e) if consumer preference increases, then the demand for the product would increase and if the price of a substitute in production decreases, then the supply of the good would increase. Combined effect of these events would be that equilibrium quantity will increase with certainty but the equilibrium price may increase or decrease or remain constant depending upon the relative strength of increase in demand and increase in supply.