Question

Graph the shift in Supply and/or Demand for all of the below scenarios. Also include an explanation AND the determinant (list is below).

Demand Determinants:

Tastes
Income for a normal good
Price of a substitutable good
Number of buyers
Expectations of changes in prices and incomes
Income of an inferior good
Price of a complementary good
Price of good itself

Supply Determinants:

Technology
Number of Sellers
Costs
Price of good itself

QUESTIONS:

1) The government gives out a tax rebate. What happens to the price and quantity of all inferior goods?

2) People expect the price of tea to increase. What happens to the price and quantity of all normal goods?

3) People start preferring Tea to coffee. What happens to the price and quantity of tea?

4) There is a baby boom. What happens to the price and quantity of diapers?

Answer 1

In each graph, price (P) and quantity (Q) are depicted along vertical and horizontal axes respectively. D0 and S0 are initial demand and supply curves, intersecting at point A. Initial equilibrium price is P0 and quantity is Q0.

(1) Demand determinant - Income of an inferior good

A tax rebate will increase disposable income, thus lowering the demand for an inferior good. Demand curve shifts to left, decreasing price and decreasing quantity. In following graph, D0 will shift leftward to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(2) Demand determinant - Expectations of changes in prices and incomes

An increase in expected price will increase current demand. Demand curve shifts to right, increasing price and increasing quantity. In following graph, D0 will shift rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(3) Demand determinant - Taste

A positive preference toward tea will increase its demand. Demand curve shifts to right, increasing price and increasing quantity. In following graph, D0 will shift rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(4) Demand determinant - Taste

A baby boom will increase the demand for diapers. Demand curve shifts to right, increasing price and increasing quantity. In following graph, D0 will shift rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.