Question

Q.2 Using well labellled diagrams,explain how the equilibrum price and and equilibrum quantity of apples will change as s result of the following,

2.1 A change in the wages of farm woorkers from R150 per day to R 200per day.

2.2 A Decrease in the price of fertilizers and a concurrent increase in the demand of apple juice.

Answer 1

Solution: Let us draw the initial equilibrium situation:

The initial equilibrium quantity is Q* and equilibrium price is P*.

a) Now if the wages of the labor increases from 150 to 200 then the firm will reduce the quantity of labor ,this will reduce the supply of apple and hence the supply of apple will shift leftward.This is shown in the figure below:

The new equilbrium price and quantity will be P' and Q' respectively.Equilibrium price increases and equilibrium quantity decreases.

2.2 If there is decrease in the price of fertilizers there will be increase in the supply and due to increase in the demand of apple juice the demand for apple will increase and the demand curve shift rightward.

Any of the three things may happen :

1. If the rightward shift in demand is equal to the rightward shift in the supply curve then the equilibrium price will remain constant and there will be increase in the equilibrium quantity.THis is shown in the following figure:

2. If the shift in the demand is greater than the shift in the supply:

You can see from the diagram equilibrium price increases and equilibrium quantity increases.

3. When the shift in the demand is lower than the shift in supply:

Equilibrium quantity will increase and equilibrium price will decrease.