DEMAND AND SUPPLY
Understanding Your Theory:
1. Why does the demand curve slope downwards?
2. With respect to both demand and supply, distinguish between the effects of a change in the price of a good, with a change in a non-price factor. What are some of these non-price factors for (a) demand and (b) supply?
3. Explain the concept of equilibrium in a market. (Ceteris paribus), is this a stable equilibrium? Illustrate your answer through a dis-equilibrium analysis.
Applying Your Theory:
4. Using the same market for oranges example from the online videos, model the changes in demand ad/or supply that might arise from the following (separate) situations:
a. An alarming segment appears on Today Tonight that says a new medical study suggests that eating more than one orange per year may result in premature blindness;
b. As a result of the accidental importation of a particularly nasty type of fruit fly, the Perth orange crop is decimated;
c. The government decides to increase the minimum wage of fruit-pickers by 30%, effective immediately.
5. A student was asked to draw a demand and supply graph to illustrate the effect on the personal computer market of a fall in the price of computer hard drives, ceteris paribus. He drew the graph below and explained it as follows: Hard drives are an input to PCs, so a fall in the price of hard drives will cause the supply curve for personal computers to shift to the right (from S1 to S2). Because this shift in the supply curve results in a lower price (P2), consumers will want to buy more PCs and the demand curve will shift to the right (from D1 to D2). We know that more PCs will be sold, but we can't be sure whether the price of PCs will rise or fall. That depends on whether the supply curve or the demand curve has shifted further to the right. I assume that the effect on supply is greater than the effect on demand, so I show the final equilibrium price (P3) as being lower than the initial equilibrium price (P1).
Do you agree with this student's reasoning? Explain.
