1.Students should figure out price and quantity changes for all possible combinations. Draw supply and demand curves in equilibrium and then work specified changes to demand and supply. Create a separate diagram for each possibility.
Demand increases and supply stays the same
Demand decreases and supply stays the same
Supply increases and demand stays the same
Supply decreases and demand stays the same
Demand decreases and supply decreases
Demand increases and supply increases
Demand increases and supply decreases
Demand decreases and supply increases
Please note, the last four might be tricky and reveal unexpected results if done correctly.
Students should give this a try before looking at the PDF solution set drawings. Itâ€™s also important to understand what shift factors will change demand and supply.
Demand changes as a result of changes in income, tastes, preferences, expectations, prices of other goods and services, number of consumers, transfer payments, and taxes (Asarta & Butters, 2022). This list is the most popular but not all inclusive. For example, Coronavirus pandemic impacts both demand and supply. Therefore, any external factor may impact demand.
Supply changes as a result of changes in technology, business expectations, resource / input prices, subsidies, taxes, number of suppliers, market regulations, natural disasters, and weather (Asarta & Butters, 2022). Here again, any factor might have an impact on supply. For example, Coronavirus pandemic disrupted global and domestic supply chains. Who would have thought buying toilet paper, cleaning supplies, and hand sanitizer would be a problem in grocery stores?
Can students see how to use supply and demand analysis to explain why toilet paper was in short supply or why gasoline is much cheaper last year than this year? Can we use supply and demand analysis to explain why so many goods are in short supply during the worst of the pandemic and this year? Max 75 words.
2.Why are consumer demand curves downward sloping? According to our readings for the week, there are three good reasons: diminishing marginal benefit, income effect, and substitution effect (Asarta & Butters, 2022).
Letâ€™s look at diminishing marginal benefit or diminishing marginal utility. Suppose a person who loves pepperoni pizza is hungry and would like to have a slice. The first slice of pizza is hot and gooey with melted mozzarella cheese. That first heavenly slice will provide a lot of satisfaction. Economists will say utility. However, first slice doesnâ€™t quench all this personâ€™s hunger. Therefore, a second slice is devoured. Second slice provides a lot of satisfaction but less than the first slice. Still hungry? A third slice will provide additional happiness at the margin but less than the first and second. A fourth slice might do it for some people and others might not be feeling so great after a fourth slice. Nevertheless, the more of a good or service consumed by an individual provides less and less satisfaction as each additional item is consumed.
An income effect is a result of a price change experienced by a consumer. For example, an individual might like eating hamburgers and has two for lunch at a cost of $12. If price of hamburgers dropped from $6 to $4, this person would be better off. With her current income, she could buy two hamburgers for $8 and have $4 to spend on a drink or fries. Because of a price change there is an income effect strengthening argument demand is downward sloping. Lower prices mean consumers can spend more and higher prices mean consumers spend less.
Substitution effect is also a result of a price change. Suppose a consumer likes to eat hamburgers for lunch. At the going rate of $6 per hamburger, this person is happy and will buy a hamburger for lunch. If the price of hamburgers rises to $8 per hamburger, this person might not be so happy or willing to purchase at that price. Instead, this consumer decides to substitute two hot dogs for lunch instead of buying the hamburger. Substitution effect results when consumers substitute one good for another when price of the first good increases. Therefore, substitution effect also strengthens reason why consumer demand is downward sloping.
Microeconomic theory is very solid when it comes to normal goods. Demand will be downward sloping as a result of diminishing marginal utility, income effect, and substitution effect.
Can students think of examples where the income or substitute effects caused a change in personal demand for some product or service? Max 75 words.