Business Environment Demand and Supply - Assignment Example

Figure shows the situation. Assuming every person buys a single Mars bar, at ?0.6 per unit, 2000 Mars bars are sold. At the initial demand curve, D0, at price ?0.6, the demand is for 2000 bars. Figure 1.1: Mars bars sold before rise in income If there is a rise in income of each person by 20%, then 20% more people will be able to purchase Mars bars. Therefore, the new number of Mars bars sold will be 2400. This is shown in figure 1 as a shift in the demand curve from D0 to D1. Observe at this new demand curve, at the initial price, 2400 people now purchase Mars bars. As a result the demand at this price is for 2400 bars. 2. If the price of Snickers increases, then the substitute for the Mars bar has become more expensive. As a result at each price, people will buy more Mars bars. Therefore, at each price there will be a higher quantity demanded of Mars bars. So the demand for Mars bars will increase. In figure 2 suppose the initial demand curve at the old price of Snicker bars is D0. This curve shows at price ?0.6 per unit of Mars bars, Q1 units are demanded. Now if the price of Snickers bars goes up, at the same price of Mars bars, more units are demanded. So, the demand curve shifts up to D1. In this new situation, at the old price of Mars bars Q2 units are demanded. Figure 2: Effect of increase in the price of substitutes 3. In figure 3, D0 is the initial demand line for Strawberries. If the price of cream fell, then a unit of Strawberries and cream together is less expensive. Since Strawberries and cream is consumed together, the quantity demanded of strawberries and cream together rises. As a result, at each price, the quantity demanded of Strawberries is now higher. So, the demand curve for Strawberries shifts out to the right to D1. Figure 3: Effect of fall in price in cream on demand for Strawberries 4. If the interest rate increases, then people have to pay more to repay the same amounts of loans. As a result, the income falls. If income falls, given the same price of cars, people can afford to buy fewer cars. Therefore, at every price, the quantity demanded of cars falls. As a result, there is a decline in the demand of cars. This is shown in figure 4. The demand for cars drops from D0 to D1. Figure 4: Effect of rise in interest rates on demand for cars 5. If the cost of production of Mars bars falls, then every unit of Mars bars can be supplied at lower price. Therefore, at each price the quantity supplied increases. This leads to an outward shift in the supply on the Mars bars. The effect is shown in figure 5 below. The initial demand and supply curves are D0 and S0 respectively. The equilibrium occurs at point A where these two curves intersect one another. Note from the vertical axis that at the initial equilibrium the price is 0.6p. Now, suppose the production cost falls. As a result, the supply curve shifts out to the right to S1. The new equilibrium is point B. Note from the vertical axis, the new equilibrium price of Mars bars is lower than the initial equilibrium price. Figure 5: Effect of reduction in producing costs 6. In figure 6, the effect of a reduction in a tax on the sales of the product is shown. Suppose initially, the tax is ‘t’. The relevant supply curve is S0+t. If the tax is taken off, the cost of the firm goes down, as a consequence the firm can supply more at each price. The supply curve without the tax is S0. Observe, if a tax is charged, then to supply an output of Q1 the firm has to charge a price of P0+t. But if there is no tax, the firm can supply the same output at a lower price of P0. Therefore, the effect of a reduction in tax is to shift the supply curve out to the right. Figure 6: Effect of a reduction in tax on the supply 7. If there is an increase in technology, the inputs become more productive. As a result, at the same per unit cost, the firm can now produce more. Therefore, at each price, the firm now is able to offer a higher quantity supplied. Therefore, due to the improvement in technology, the firm’s supply increases. The effect is to shift the supply curve from S0 to S1 in figure 7. Figure 7: Effect of increase in technology on supply 8. If the cost of production increases due to implementing anti-pollution control then every unit supplied costs more. Therefore, the price charged on every unit of output increases. Thus, at every price, the quantity of output supplied falls, leading to a leftward shift of the supply curve. This is shown in figure 8. Figure 8: Effect of cost-increasing anti-pollution measures on supply The initial supply curve is S0. As the pollution control measures are put into place, every unit of output costs more and as a result, the output supplied at each price drops. The effective supply curve after the anti-pollution measures are imposed is S1. 9. Weather is an important input to production. If there are bad weather shocks, then the productivity of all other inputs such as capital and labour fall. As a result, under bad weather, at each price, less output is available to supply to the market. On the other hand, if there is a good weather shock, all other inputs become more productive. This leads to a higher quantity supplied at each price. Therefore, if there is a bad weather shock, the supply curve shifts inward to the left. And if there is a good weather shock, the supply curve shifts out to the right. This is shown in figure 9. S0 is the initial supply curve. If there is a bad weather shock, the new supply curve is S­bad. Similarly, if there is a good weather shock, the new supply curve is Sgood. Figure 9: The impact of weather shocks on supply 10. Chicken and Lamb are substitute goods. Therefore, if the price of lamb goes down, the impact on demand for chicken is identical to the effect of the price of a substitute going down. Since lamb now is less expensive, the consumer will spend more of her income on lamb and less on Chicken. As a result, there is a fall in the demand for Chicken: at every price, less quantity of chicken is demanded. This is shown in figure 10. The demand curve of Chicken shifts down from D0 to D1. Figure 10: Effect of fall in price of lamb on the demand for chicken 11. Petrol and Cars are complements. As a result, if the price of petrol goes up, the effect on the demand for cars is the same as the effect of an increase in the price of a complement. The two products consumed together becomes more expensive. The increase in the price of petrol leads to a reduction in the consumption of petrol. And because cars are complements, the demand for cars falls. From an initial demand of D0, the rise in price of petrol leads to a new lower demand for cars, D1­. In other words, the rise in price of petrol causes the demand for cars to shift down from D0 to D1. This is shown in figure 11. Figure 11: The effect of a rise in price of petrol on the demand for cars 12. When the price of a good (general good, not Giffen good) goes up, there is a fall in the quantity demanded. In figure 12, suppose P0 is the initial price. The quantity demanded at this price is Q0. Now if the price rises to P1, consumers find other goods to be relatively cheaper. Additionally, the consumers purchasing power falls. As a result, the consumers shift a part of there expenditure onto other substitute goods. Additionally, due to the loss in purchasing power, the consumer purchases less of all goods. The combined impact is that the consumer purchases a lower amount of the good. The new quantity demanded is therefore Q1. The important point to note is that the change in the own price of a good leads to a change in quantity demanded of the good. These changes occur along the original demand curve. That is a change in the price of a good leads to a move along the demand curve. However, a change in the price of substitutes or complements, leads to a change in demand. That is, the demand curve shifts in these cases (such as the situations in questions 10 and 11). Figure 12: The effect of a price rise 13. When the income of the consumers goes down, consumers have less to spend on every good. As a result the demand for every good falls. In other words, for every good, the consumers are willing to purchase lower amounts at each price. This causes the demand curve to shift inward to the left, as shown in figure 13. Figure 13: effect of a fall in income of consumers 14. When there is an increase in advertising, the good becomes more attractive to the consumers at every price. As a result, the quantity demanded at each price rises – the demand curve shifts out to the right. This is shown in figure 14. Figure 14: Effect of increase in advertising on the demand of a good 15. If there is a change in tastes away from a product, less of it is demanded at each price. As a result the demand for the good drops. The demand curve shifts inwards to the left. This is shown in figure 15. Figure 15: Effect of a change in tastes away from the good 16. When the price of a good goes down, the quantity demanded of that good goes up. In figure 16, the initial price is P0 and the quantity demanded is Q0. If the price falls to P1, the good becomes relatively less expensive compared to all other goods. So, the consumer intends to buy more of this relatively cheaper product compared to other substitutes. Additionally the consumer’s real income is higher. That is the consumer’s purchasing power has increased. As a result the demand for all goods rises. The combined impact is that that the quantity demanded for the good goes up to Q1. Figure 16: Effect of a fall in price of a good Again observe that the effect of a change in price of a good is reflected by a movement along the demand curve. As the price of the good falls, the consumer moves downward along the demand curve. 17. When the weather is bad, the supply of carrots falls. That is, at each price less quantity is supplied. As a result, the supply curve of carrots shifts to the left. In figure 17, D0 is the initial demand curve, and S0 is the initial supply curve. The initial equilibrium point is A. The equilibrium price is P0 and the initial equilibrium output is Q0. Due to the weather shock, the supply curve shifts to S1. The new equilibrium point is B. The equilibrium price rises to P1 and the equilibrium output falls to Q1. Figure 17:Effect of bad weather shock on supply of carrots and the resulting effect on equilibrium 18. When the government grants a subsidy on the product, it becomes less expensive to produce. As a result, at each price, more of the product can be supplied. So at each price the quantity supplied increases. Therefore, there is an increase in the supply of the product. This is shown in figure 18. The supply curve shifts from S0 to S1. Figure 18: Effect of a subsidy on the supply of a good 19. If the government imposes a tax on the output of the good, supplying each unit becomes more expensive. As a result, at each price, less quantity of output is supplied causing a shift of the supply curve to the left. This is shown in figure 19. Figure 19: Effect of a tax on supply of a good 20. If the costs of coffee beans goes up, then it is more costly to supply coffee to the market. As a result, every unit of output now is more expensive. Therefore, for each quantity of output, the price at which the supplier is willing to sell the product has increased. Thus, the supply of coffee falls: the supply curve shifts left, as shown in figure 20. Figure 20: effect of increased cost of coffee beans on the supply of coffee. 21. The answer to this question is identical to the answer for question 7 22. Part (i): Price is higher than equilibrium price This situation is depicted in figure 22.(i). P* is the equilibrium price and Q* is the equilibrium output. If the price is P’, the quantity demanded is QD and the quantity supplied is QS. Figure 21.(i): Above equilibrium price Note from the diagram, that the supply exceeds the demand and thus there is a surplus. The magnitude of the surplus is given by the distance QDQS in the diagram. Part (ii): Price is lower than equilibrium price If market price is lower than equilibrium price, there is a shortage. This is shown in figure 22.(ii). At price P’QS = the supply. As a result there is a shortage of quantity supplied relative to quantity demanded at this price. Figure 21.(ii): Below equilibrium price Read More