2. Typically, goods that are in high demand have a high market price. However, some goods...

2. Typically, goods that are in high demand have a high market price. However, some goods that are in high demand during their peak season have lower prices as compared to their out-of-season price. Use your knowledge of supply & demand to explain the lower equilibrium price of cherries sold in the summer (their peak season), as compared to their price during the rest of the year (say, in the winter). Show it graphically and briefly explain. (3 pts.)

Hint: You should draw two demand and two supply curves in the same graph (for winter and summer). Start with the winter to show your initial demand and initial supply of cherries. Then, show the changes that occur in the summer months and prove that the price of cherries in the summer is lower than in the winter.

Solutions

Expert Solution

It is true that most of the time the goods that are in high demand bear a high market price. This happens when all other factors are stationary and only the demand is higher (shifted to the right).

However, there are cases when for some goods, even when the demand is very high because of a peak season where people like to consume them more, we see that these goods tend to have lower prices. This is the time when other factors play their part.

Assume that we begin with an off peak period at E in winter where current price of cherries is P0 and quantity of cherries is q0 and the market is in equilibrium. As the peak season or the summer season arrives the demand starts increasing so demand curve shifts right. The new price is P1 and quantity is Q1 and we reach at F

At the same time, there is a good harvest so that supply of cherries is also increased. Supply curve shifts to the right. It may happen that the size of shift in demand curve is less than that of the supply so that price of cherries actually falls while quantity traded rises sharply. This implies we reach at G finally where price is P2 and quantity is Q2. Note that P2 < P0

Rahul Sunny answered 1 year ago

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