Question

Derive a graph showing the market for Apples in Equilibrium.

a.) Mention Three (3) facts associated with the equilibrium point for this market:

b.) What happens if the price of Apples falls below the Equilibrium Price?

c.) What factors a=may shift the Demand Curve for Apples to the right?

Answer 1

a. The equilibrium is established at a market clearing price where the demand is equal to the supply of apples. The factors that determine the equilibrium:

1. Income of the consumer

2. Consumers expectations of future prices

3. Price of related goods, that is, substitutes or complements.

4. Tastes and preferences

b. If the price falls below equilibrium price, there will be excess demand in the market. This is because the demand is more than the supply of apples available. This will lead to an increase in the market price if supply does not increase.

c. The demand curve shifts to the right when demand for a good increases. Factors that cause the demand curve of apples to shift to the right:

1. Increase in Income- When the income of the consumer increases, he or she will demand more apples. This will lead to a rightward shift of the demand curve.

2. Rise in the price of substitutes- If the price of a substitute, for instance, orange increases, then the demand for apples will increase leading to a new demand curve to the right of the original one.

3. Change in taste and preferences- If the consumer's taste changes in favor of apples, then this will lead to an increase in the demand for applies.

4. Expectations of future prices- If individuals expect that the prices of apples will rise in future, the demand for apples will rise in the current period.