Analyzing Factors' Impact on Fruit Demand & Supply: Banana Microeconomics, Assignments of Economics

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Microeconomics

Assignment 2

INSTITUTE OF MANAGEMENT

SCIENCES, PESHAWAR

1. Illustrate each of the following events using a demand and supply diagram for bananas. a. Reports surface that imported bananas are infected with a deadly virus. When the imported bananas are infected with a deadly virus what happens to the demand and supply curve. A report says that the bananas that have been imported are infected with a deadly virus, this will lead to the shift of consumers towards other fruits available in the market. Hence, the demand for the bananas will be less which will shift the demand curve towards left. In the given graph, D1 is the initial demand curve, S is the initial supply curve, Peq1 is the initial price and Qeq1 is the initial quantity. Due to change in preferences of customers D1 shifts to D and S1 remains same. Price shifts from Peq1 to Peq2 creating a surplus in the market, hence, the price fall to a new equilibrium point e2, now the price is Peq2 and quantity is Qeq2. b. Consumers' incomes. When the consumers' income drops or decreases what happens to the demand and supply curve.

Oranges are a substitute to bananas. As the price of oranges fall, it causes a shift in the consumers preference. They start consuming more oranges than bananas. So, the quantity demanded for bananas fall and the demand curve of bananas shifts toward left reducing the price and consumption. Hence, at the new equilibrium point e2 price is reduced to Peq2 and quantity is reduced to Qeq2. e. Consumers expect the price of bananas to decrease in the future. When the consumers assume the price of bananas to fall in future what happens to the demand and supply curve. When consumers feel the price of bananas would fall in future, they would stop the consumption of bananas at the current price creating a surplus in the market. This would lead to reduction in price of the bananas. At the new point of equilibrium Price would be reduced to Peq2 and quantity would come down to Qeq2.

2. Consider the following events: scientists reveal that consumption of oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees more productive. Illustrate (using supply-and-demand diagrams) and explain what effect these changes have on the equilibrium price and quantity of oranges. The news of the increased health benefits from consuming oranges will increase the demand for oranges, increasing both the equilibrium price and quantity. If farmers use a new fertilizer that makes orange trees more productive, the supply of oranges will increase, leading to a fall in the equilibrium price but a rise in the equilibrium quantity. If both occur at the same time, the equilibrium quantity will definitely rise, but the effect on equilibrium price will be ambiguous. 3. Using supply-and-demand diagrams, show the effect of the following events on the market for sweatshirts. a. A hurricane in South Carolina damages the cotton crop (and cotton is an input for sweatshirts). When a hurricane in South Carolina damages the cotton crop, it raises input prices for producing sweatshirts. As a result, the supply of sweatshirts shifts to the left. The new equilibrium price is higher and the new equilibrium quantity of sweatshirts is lower.

d. New knitting machines are invented. The invention of new knitting machines increases the supply of sweatshirts. As Figure 25 shows, the result is a reduction in the equilibrium price and an increase in the equilibrium quantity of sweatshirts.

4. The market for pizza has the following demand and supply schedules:

Price ($) 4 5 6 7 8 9 Quantity Demanded 135 104 81 68 53 39 Quantity Supplied 26 53 81 98 110 121 a. Graph the demand and supply curves. What is the equilibrium price and quantity in this market? Equilibrium price = $ Equilibrium quantity = 81 b. If the actual price in this market were above the equilibrium price, what would drive the market toward the equilibrium?

c. Draw two more diagrams to show how the change in the market for TV screens affects the market for DVDs and the market for movie tickets. The reduction in the price of TV screens would lead to an increase in the demand for DVDs because TV screens and DVDs are complements. The effect of this increase in the demand for DVDs is an increase in both the equilibrium price and quantity. The reduction in the price of TV screens would cause a decline in the demand for movie tickets because TV screens and movie tickets are substitute goods. The decline in the demand for movie tickets would lead to a decline in the equilibrium price and quantity sold.