Draw a demand curve and a supply curve for one of your favourite goods and explain why the point of intersection for demand and supply gives the equilibrium.also illustrate diagrammatically what happens to the equilibrium price and quantity in this market as a result of a decrease in all consumers’ income. Here you have to consider: Whether a change in all consumers’ income has an effect on the demand or the supply side of the market. How to establish the direction of the change (increase or decrease?) How to deduce the impact on the equilibrium. Go back to the original equilibrium; to the point before the consumer income decrease. Now, consider that the market is flooded by new firms wanting to produce the good. Draw this change—again, consider the three points mentioned above. Finally, let’s put the two things together. What happens if you simultaneously decrease income and increase the number of firms involved in the market in terms of the new equilibrium price and quantity? Hint: Draw the changes in the curves separately to see if you can get a different answer about the change in equilibrium price or quantity.
Draw a
- Whether a change in all consumers’ income has an effect on the demand or the supply side of the market.
- How to establish the direction of the change (increase or decrease?)
- How to deduce the impact on the equilibrium.
Go back to the original equilibrium; to the point before the consumer income decrease. Now, consider that the market is flooded by new firms wanting to produce the good. Draw this change—again, consider the three points mentioned above.
Finally, let’s put the two things together. What happens if you simultaneously decrease income and increase the number of firms involved in the market in terms of the new equilibrium price and quantity?
Hint: Draw the changes in the curves separately to see if you can get a different answer about the change in equilibrium price or quantity.
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