Question

Additional Supply and Demand Practice For each of the following scenarios, determine which curve or curves will shift and in which direction they will move.  What will happen to the Equilibrium Price and Equilibrium Quantity?
Consider the Market for a Snickers Bar.
1. The price of a Twix, a substitute good, increases.
2. The price of peanuts, and input in Snickers bar production decreases.
3. Snickers bars are linked to causing cancer.
4. Twix bars are linked to causing cancer.
5. The price of peanuts increases, and the price of Twix decreases.

Consider the market for Medical Examinations.
1. Employers begin requiring new employees to get a yearly physical examination.
2. The cost of tongue depressors increases.
3. Electronic record keeping increases health care providers efficiency.
4. The starting salary for Doctors decreases.
5. All citizens are required to have health insurance and the cost of renting office space for the doctor's offices decreases.

Answer 1

Market for Snickers Bar

1. Price of Twix,  a substitute good, increases.

Answer: It will cause the demand curve of Snickers bar to shift right. Since Twix and Snickers are substitute goods, and the price of Twix has risen, consumers will demand less of Twix. And because there is another alternative present, that is Snickers, these consumers will buy Snickers instead. Hence demand for Snickers has gone up. Because there is an increase in demand of Snickers for every price, the demand curve will shift right. Equilibrium price will increase and equilibrium quantity will increase. This is shown by the graph below:

2. The price of peanuts, and input in Snickers bar production decreases.

Answer: It will cause the supply curve of Snickers bar to shift right. The reason is because now that the production of Snickers is cheaper, manufacturers could supply more Snickers at the every price. Since there is an increase in supply due to a factor other than the price, that is, more quantity is supplied at every price level, the supply curve will shift right. Equilibrium price will decrease and equilibrium quantity will increase. The line shifting is shown below. Red line is the old supply curve and purple line is the new supply curve.

3. Snickers bars are linked to causing cancer.

Answer: This will cause demand curve to shift left. Because snickers bar is linked to causing cancer, people will start demanding less. Since there is a decrease in quantity demanded at every price of snickers bar, the demand curve will shift left. Equilibrium quantity will decrease and equilibrium price will also decrease. This is shown below. The old demand curve shown by blue shifts left, the new demand curve is green.

4. Twix bars are linked to causing cancer.

Answer: This will cause demand curve of Snickers bar to shift right. This will happen because Twix and snickers are substitutes. As Twix is linked to causing cancer, people will demand Twix less. They will instead buy snickers more because Twix and snickers are substitutes. Hence demand for Snickers will go up. Because there is an increase in demand due to a factor other other than price, the demand curve will shift right. Both Equilibrium Price and Quantity will increase. This is shown above in the first graph.

5. The price of peanuts increases, and the price of Twix decreases.

Answer: When price of peanuts increases, this denotes the fact that production of snickers has gone up, since peanuts is an input. Hence this will cause supply curve to shift left. Because of this Price will rise and quantity will fall. And as price of Twix falls, the demand curve of Peanuts will shift left, because Twix and snickers are substitute goods. Because of this shift, Price will fall and quantity will also fall.

Hence Equilibrium Price will be ambiguous. It will depend on the proportion of shift between demand and supply. If demand shifts more than the supply, then price will decrease. But if supply shifts more than the demand, then the price could increase.Equilibrium Quantity will definitely decrease.

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Consider the market for Medical Examinations.
1. Employers begin requiring new employees to get a yearly physical examination.

Answer: If employers will begin requiring more yearly medical examinations, this will cause more demand for medical examinations. Hence for every price, demand for medical exam has increased. This will cause demand curve to shift right. Equilibrium Price and Quantity will both increase. This is shown by the first graph if previous question.

2. The cost of tongue depressors increases.

Answer: Tongue depressors are used by doctors to perform a medical exam. Because the cost of tongue depressors have increased, this means that for doctors it has become more costly to conduct an exam. In a way, tongue depressors is an input towards medical exam. Hence this will cause supply to reduce for every price. Therefore supply curve will shift left.This will lead to increase in Equilibrium price of medical exam and decrease in the quantity. (This is shown by shift from red line to red dotted line)

3. Electronic record keeping increases health care providers efficiency.

Answer: Increase in efficiency could mean that the cost of providing healthcare has reduced. Therefore this will cause supply curve to shift right. Equilibrium price will decrease and equilibrium quantity will increase as shown by graph above (1st question, 2nd part).

4. The starting salary for Doctors decreases.

Answer: If doctors salary decreases, this mean the overall cost of medical exam decreases. This means that more medical exams could be supplied at the same price. Therefore supply curve will shift right. Equilibrium price will decrease and equilibrium quantity of medical exam will increase.

5. All citizens are required to have health insurance and the cost of renting office space for the doctor's offices decreases.

Answer: If all citizens are required to have health insurance, this would mean that more people will go for medical exam. Hence because there is an increase in quantity if medical exam demanded for every price, the demand curve will shift right. This will lead to an increase in price and quantity demanded.

On the other hand cost of renting office space for doctors decreases. Hence because this cost is incorporated in the overall cost of medical exam, the overall cost will decrease. This will lead to a shift of supply curve towards left. As a result there will be an decrease in price and increase in quantity.

So the net price effect is ambiguous. Because price increases due to demand an decreases due to supply shift, the overall price will depend on which shift is more. If demand shifts more than the supply, the final price will increase. If supply shifts more than the demand, the final price will decrease. The equilibrium quantity however will increase.