Question

Use supply and demand curves to illustrate the impact of each the following separate events on the equilibrium price and quantity of oranges. For each of the four situations, label your curves, axes, and the equilibrium prices and quantities, showing the coordinates of the equilibrium points on the axes. Also include a brief verbal explanation; state any assumptions you make.

1) A study finds that a daily glass of orange juice reduces the risk of heart disease.

2) The price of grapefruit falls drastically.

3) The wage paid to orange pickers rises.

4) Exceptionally good weather provides a much greater-than-expected orange harvest.

Answer 1

In each graph, price and quantity of the relevant good are measured vertically and horizontally, respectively. D0 & S0 are initial demand & supply curves intersecting at point A with initial price P0 & quantity Q0. It is assumed that demand curve follows the law of demand & is downward sloping, and supply curve follows the law of supply & is upward rising.

(1) Favorable report for consumption of orange juice will increase in the demand for oranges, shifting its demand curve rightward, increasing both price and quantity. In following graph, as D0 shifts right to D1, it intersects S0 at point B with higher price P1 and higher quantity Q1.

(2) Fall in price of grapefruit, a substitute for oranges, will decrease in the demand for oranges, shifting its demand curve leftward, lowering both price and quantity. In following graph, as D0 shifts left to D1, it intersects S0 at point B with lower price P1 and lower quantity Q1.

(3) Higher wage to orange pickers increases the cost of input, which will decrease supply of oranges, shifting its supply curve leftward which will increase price and decrease quantity of oranges. In following graph, as S0 shifts left to S1, it intersects D0 at point B with higher price P1 and lower quantity Q1.

(4) Exceptional harvest will increase supply of oranges, shifting its supply curve rightward which will decrease price and increase quantity of oranges. In following graph, as S0 shifts right to S1, it intersects D0 at point B with lower price P1 and higher quantity Q1.