Question

4. Describe how the demand for an over-the-counter sinus medication would change in the following situations? For each event (i, ii, iii, iv and v), answer a), b), and c), questions below.

a. Does the supply curve or the demand curve shift? In which direction?

b. State whether the equilibrium price and quantity increase, decrease or stay the same.

c. Show the changes using a standard demand/supply diagram.

i. The local population increases.

ii. The price of another sinus medication drops.

iii. Factory closings lead to a drop in the area’s average income

iv. A competing product with a different formula is found to be unsafe.

v. A research study showing that the medication causes sever dizziness is published.

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.

(i) Increase in population will increase the demand for OTC medicines, shifting the demand curve rightward, increasing both price and quantity. In following graph, D0 shifts right to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(ii) Decrease in price of a substitute will decrease the demand for OTC medicines, shifting the demand curve leftward, decreasing both price and quantity. In following graph, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(iii) Decrease in consumer income will decrease the demand for OTC medicines, shifting the demand curve leftward, decreasing both price and quantity. In following graph, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(iv) Unhealthy and risky health report of a substitute will decrease demand for the substitute and increase the demand for OTC medicines, shifting the demand curve rightward, increasing both price and quantity. In following graph, D0 shifts right to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(v) A negative and risk health report will decrease the demand for OTC medicines, shifting the demand curve leftward, decreasing both price and quantity. In following graph, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.