Question

Using the supply and demand method of analysis, explain how a decrease in the price of apple juice and a simultaneous increase in the wage rate paid to orange grove workers affect the equilibrium price and equilibrium quantity of orange juice.

Answer 1

Apple juice and orange juice are substitutes .Thereore, decrease in the price of apple juice would decrease the demand for orange juice and increase the demand for apple juice.Therefore, demand curve for orange juice shift to the left .

And if there is increase in the wage rate paid to orange grove workers , this will shift the supply curve to the left.Because wage rate is the cost of the inputs and if there is increase in the input costs then supply of oranges decreases .

By putting both these effects , we get that equilibrium quantity fall from Q1 to Q2. But the affect on Equilibrium price is undetermined. It depends on the shift in demand and supply curves. If supply decreases by more than the demand ,then Equilibrium price increase And if demand decreases by more than the supply then , Equilibrium price decreases.

Hence, effect on Equilibrium price is undetermined and effect on equilibrium quantity is that quantity of orange juice falls.