Question

Question 1

Consider the demand for more expensive restaurant meals (a normal good) in a given city. For each of the following, ceteris paribus (holding all else equal), will there be a shift in the demand curve, or a change in the quantity demanded? Is the change an increase or a decrease? Explain your answer briefly.

1. The income tax rates (across all income brackets) rise in the economy.
2. The economy enters a recession, and unemployment rises in the city.
3. The restaurant owners face higher costs to produce meals.
4. The average price of restaurant meals rise.
5. Several new competing restaurant open up in the city.

Answer 1

A movement along the demand curve occurs when a change in quantity demanded is caused only by a change in price, and vice versa. A shift in a demand  curve occurs when a good's quantity demanded changes even though price remains the same. Factors causing a shift in the demand curve are size of the market, consumer income, price of substitutes and complements, tastes and preferences, price expectations.

Change in quantity supplied is the movement along the supply curve, whereas, change in supply is the shift in the supply curve due to changes in costs of production, technological advances, prices of related goods, price expectations, number of sellers.

a. Consumer income will decrease causing a shift in the demand curve to the left (decrease).

b. Market size decreases. Consumer spending will decrease which again causes a shift in the demand curve to the left (decrease).

c.When cost of production increases, the supply curve will shift to the left (decrease).

d. Movement along the demand curve, quantity will fall.

e) Number of suppliers will increase, the supply curve shifts to the right (increases).