Question

1.During the financial crisis of 2008 -2009 CPI in the USA decreased dramatically. What can explain such a decrease? What elements of the CPI basket were affected by the crisis and why? How do you think the CPI will change in 2020?

2.What are the determinants of demand? What happens to the demand curve when any of these determinants change? Distinguish between a change in demand and a movement along a fixed demand curve, noting the cause(s) of each.

3. Use the ideas of consumer surplus and producer surplus to explain why economists say competitive markets are efficient. Why are below- or above-equilibrium levels of output inefficient, according to these two sets of ideas?

Answer 1

1 During the financial crisis of 2008 -2009 , the CPI in the USA decreased , it happened all because of the recession . The failing of the banks , the rising unemployment and various other factors which were directly influencing the US economy . See explaining the decrease in such a situation is basically the reason that the consumers tend to save more and spend less taking the considerations for future savings . Therefore the CPI falls during the time of recession . The elements that were effected by the CPI crisis were that  it effects the purchasing power of the consumer , overall the inflation rates and what are the price changes that are happening in the economy they were affected because the Consumers were  not having the money so would the purchasing power increase so definitely consumer price index will effected .

The CPI will even change and has been changing in 2020 due to COVID 19 the CPI will definitely change the prices in US have dropped in case of some products due to the recession gripping the country badly effecting the purchasing powers . The CPI index is definitely falling down . Its only in the case of healthcare products where the profits are increasing and the people have to purchase the these products with no ifs and buts . The economy is continuously getting package from the other financial institutes to control the situation but none other than people are suffering . Prices are continuously going down which is bringing the situation of deflation .

2 The deteminants of demand are as follows -

1 Income of the individual

2 Price of the product

3 Expectations, taste and prefrences of the consumer

4 Customer base

5 Economic conditions ie the situations prevalent

Definitely if any of these deteminants change it has an impact on the demand curve if the income changes , price changes or any other change if the prices fall definitely demand will increase and viceversa so definitely the demand curve will shift . If the curve shifts to the left then the deteminant has caused the demand to drop.

If the demand curve  shifts to right then the deteminant has caused the demand to rise .Now when I talk about the movement along the demand curve there are certain products which are irreplacable and have to be purchased so no matter whatever the cost is the consumer will purchase . Like salt , sugar etc . Rest if the demand curve is  shifting for other product means their demand is getting influenced by the deteminants and it will shift as explained earlier .

3 See Consumer surplus is the difference between the price the consumer is willing to pay and the actual price offered and producer surplus is just the same from the point of view of consumer i.e the amount the person is willing to accept for a product v/s the amount they can receive by selling the good at the , market price . So therefore when I talk about the competitive market the producer who would be offering the product at the best price in the market will attract the sale and eventually his equilbrium of output will be maintained and if the consumers are not purchasing in the competitive market then definitely the equlibrium won't be maintained and resulting lower profits so for the survival it is necessary to maintain the equilibrium . When I talk about inefficiency then definitely if the producer is himself not making profits then how can the surplus happen and how would the equilibrium be maintained it will definitely fall down .