Question

Graph the shift in Supply and/or Demand for all of the below scenarios. Also include an explanation AND the determinant (list is below).

Demand Determinants:

Tastes
Income for a normal good
Price of a substitutable good
Number of buyers
Expectations of changes in prices and incomes
Income of an inferior good
Price of a complementary good
Price of good itself

Supply Determinants:

Technology
Number of Sellers
Costs
Price of good itself

QUESTIONS:

1) The cost of making plastic toys increases. What happens to the price and quantity of toys?

2) A new toy store opens. What happens to the price and quantity of toys?

3) A new machine is invented to produce toys faster. What happens to the price and Quantity of toys?

4) A new toy store opens and at the same time people start preferring toys to candy. What happens to the price and quantity of toys?

Answer 1

In each graphs, price (P) and quantity (Q) are depicted along vertical and horizontal axes respectively. D0 and S0 are initial demand and supply curves, intersecting at point A. Initial equilibrium price is P0 and quantity is Q0.

(1) Supply determinant - Costs

Higher cost of production will make firms reduce production, decreasing supply. Supply curve shifts to left, increasing price and decreasing quantity. In following graph, S0 will shift leftward to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

(2) Supply determinant - Number of sellers

Increase in number of sellers will increase supply. Supply curve shifts to right, decreasing price and increasing quantity. In following graph, S0 will shift rightward to S1, intersecting D0 at point B with lower price P1 and higher quantity Q1.

(3) Supply determinant - Technology

Technological improvement will decrease production cost, so firms will produce more which will increase supply. Supply curve shifts to right, decreasing price and increasing quantity. In following graph, S0 will shift rightward to S1, intersecting D0 at point B with lower price P1 and higher quantity Q1.

(4) Demand determinant - Tastes, Supply determinant - Number of sellers

A preference towards toys will increase its demand, shifting demand curve rightward and increasing both price and quantity. An increase in number of sellers will increase supply. Supply curve shifts to right, decreasing price and increasing quantity. The net effect is a definite increase in quantity, but effect on price is indeterminate. In following graph, D0 will shift right to D1 and S0 will shift rightward to S1, intersecting at point B with higher quantity Q1 and new price P1.