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Show in diagrams that if a speculator were to buy when price is high and sell when price is low, he would increase price fluctuations. Why would it be in his best interest not to do so? ( Hint: Draw two supply-demand diagrams, one for the high-price period and one for the low-price period. How would the speculator’s activities affect these diagrams?)

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Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992

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Section
BuyFindarrow_forward

Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992
Chapter 4, Problem 7DQ
Textbook Problem
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Show in diagrams that if a speculator were to buy when price is high and sell when price is low, he would increase price fluctuations. Why would it be in his best interest not to do so? (Hint: Draw two supply-demand diagrams, one for the high-price period and one for the low-price period. How would the speculator’s activities affect these diagrams?)

To determine

To discuss: The activities of a speculator, if he/she were to buy when the price is high and sell when the price is low.

Explanation of Solution

Speculation: Not all buyers buy goods to consume. Some people purchase goods and store them in to sell them later at a higher price in future. This activity is known as speculation.

Normally, speculators buy goods at a lower price and sell them at a higher price to make gains.

Sometimes speculators behave irrationally; when they buy goods at a high price and sell them at a low price, which increases price fluctuation in the market.

Buying goods at a high price and selling them at a low-price lead to losses as the price paid to purchase goods is higher than the price received by selling the goods in the market at lower prices.

When the speculator purchases in the high-priced period and sells in the low-priced period, it leads to fluctuations in the price.

The diagram for the high-priced period is as follows:

  

In the above diagram, D1 is the demand curve for goods and S1 is the supply curve of goods before the entry of speculator. When the speculator enters the market, the demand curve shifts rightwards to D2.

When the speculator buys goods in bulk at an already high price of P1(suppose it is the higher price prevailing in the market), it will lead to increase in demand for goods and services in the market and this will cause a rightward shift in demand curve from D1 to D2...

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