Question

For each of the following market situations, explain whether the supply curve or the demand curve shifts, in which direction does it shift, and the equilibrium price and quantity as a result of the change. Please draw diagram for each and also explain the reasoning

a) The market for Ginkgo Biloba after studies shows its efficacy at memory retention with no adverse side effects.

b) The market is for automobiles after the price of steel, which is used to produce automobiles, increases by 50%.

c) The market is for daily newspapers as more news becomes available for free on the Internet.

d) The market is for accounting services after spreadsheet and accounting software is introduced for use with personal computers.

Answer 1

a) This will attract more consumers in the market. With increase in the number of consumers, this is likely to increase demand. As the demand curve shifts to the right, equilibrium price will increase. Equilibrium quantity traded increases as well.

b) This will increase cost of producing automobiles in the market. With increase in input cost and resultant lower production, this is likely to decrease supply. As the supply curve shifts to the left, equilibrium price will increase. Equilibrium quantity traded decreases however.

c) This will reduce the readers since a substitute is now available at cheaper rates. With decrease in the price of substitute, this is likely to decrease demand. As the demand curve shifts to the left, equilibrium price will decrease. Equilibrium quantity traded decreases as well.

d) This will decrease cost of producing these services as there is an advancement in technology in the market. With advance technology and increased production, this is likely to increase supply. As the supply curve shifts to the right, equilibrium price will decrease. Equilibrium quantity traded increases however.