Question

Assume in a simple example that something occurs in an economy which produces “Good X” that changes consumer preferences. This will decrease consumer preferences for “Good X” in the economy. Assume that this is a competitive market and that “Good X” is a normal good, what will happen to the equilibrium price and quantity of “Good X”? Use supply and demand analysis to demonstrate your answer and be sure to provide the rationale behind what is happening and also discuss any interesting observations or outcomes. (Note: The magnitude of any supply and/or demand shifts in this example are not specified; you may want to consider the magnitude of any shifts in your analysis).

Answer 1

Law of demand: In case of normal goods (like bread, shirt, etc) increasing price decreases the quantity demand, and vice versa; therefore, there is the inverse relationship between price and quantity. The demand curve should be downward slopped from left to right.

Law of supply: At increasing price higher would be the quantity supply, and vice versa; therefore, the relationship is direct here. The supply curve should be upward slopped from left to right.

Equilibrium is the point where the demand and the supply interests. This is the point of market stability, satisfaction, and preference; both suppliers and consumers want to stay at this point.