Question

Problems 1 – Explain each of the following statements using supply-and-demand diagrams.

1. “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country.”

2. “When the weather turns warm in New England every summer, the price of hotel rooms in Caribbean resorts plummets.”

3. “When a war breaks out in the Middle East, the price of gasoline rises and the new price of a used Cadillac falls.”

   
   

Answer 1

(Problem 1)

In all of the following graphs, D0 and S0 are initial demand and supply curves intersecting at point A with equilibrium price P0 and quantity Q0.

(a)

A cold snap destroys crop which will decrease supply of orange, shifting its supply curve leftward, increasing price and decreasing quantity. Since orange is an input to orange juice, higher input price reduces the supply of orange juice, shifting its supply curve leftward, increasing price and decreasing quantity.

In following graph, S0 shifts left to S1, intersecting S0 at point B with higher price P1 and lower quantity Q1.

(b)

Warmer weather decreases demand for hotels (since less tourists come), shifting 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.

(c)

The war disrupts supply of oil, which reduces the supply of oil, shifting its supply curve leftward, increasing price and decreasing quantity.

In following graph, S0 shifts left to S1, intersecting S0 at point B with higher price P1 and lower quantity Q1.

Since oil and cars are complements, higher price of oil decreases demand for cars, shifting its 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.