Quiz 4: The Market Forces of Supply and Demand


Demand: Demand refers to the desire and ability of the consumer to buy goods and services at the prevailing price. Demand curve: Demand curve refers to the graph that illustrates the amount of goods and services demanded at various levels of price. Since demand curve is negatively related to price, it falls from left to right. Changes in the demand The change in the price of commodity leads to a movement along the demand curve. Whereas, when there are changes in other independent variables except price, the demand for the good shifts upward or downward. Thus, change in the price of Hamburger cause movement along the demand curve: whereas, change in the price of hot dog as a substitute good, price of hamburger bun and the income of the consumer will shift the demand curve of hamburger. Hence, option 'b' is correct.

(a) When a cold snap hits Florida, the supply of oranges decreases. With the demand for orange juice constant, the price of orange juice will increase as shown in the supply and demand diagram. The new equilibrium price is higher than the old equilibrium price. img Figure 1 DD and img are the original demand and supply curves. They intersect at img , which is the equilibrium point. At this, img quantity is supplied at img price. As a result of the cold snap, the supply decreases to img . The new equilibrium is at img . At this, the new price is img . The price increases from img to img . (b) When the weather turns warm in New England every summer, the price of hotel rooms in Caribbean resorts plummets. This is the result of a fall in the demand for hotels at Caribbean resorts and the supply of hotels is constant. The result, as shown in the figure, is a shift to the left in the demand curve. Thus, the equilibrium price of Caribbean hotel rooms is lower in the summer than in the winter, as the figure shows. img Figure 2 From the above diagram, the demand curve img shifts left to img . The supply curve SS is constant. The price falls from img to img due to a fall in the demand of hotels. (c) When a war breaks out in the Middle East, the supply of gasoline falls. Demand being constant, the price of gasoline rises. The supply curve of gasoline shifts to the left, as shown in the figure. The result is a rise in the equilibrium price of gasoline. img Figure 3 The fall in the supply is represented by a leftward shift in the supply curve from img . Demand is constant at DD. Price increases from img . The price of used Cadillacs will fall due to war. Gasoline and Cadillacs are complementary goods. As the price of gasoline increases, people start selling their Cadillacs in the secondary market. As the supply of used Cadillacs increases, the price of used Cadillacs falls. As a result, the demand curve of used Cadillacs shifts to the left, while the supply curve shifts to the right, as shown in the figure. The result is a decline in the equilibrium price of used Cadillacs. img Figure 4 In the diagram shown, the increase in the supply of used Cadillacs is shown by a rightward shift from img . Demand being constant, the price of used Cadillacs will fall from img to img .

In competitive market, there are many buyers and sellers such that each has a negligible impact on the market price. Since there are a large number of sellers and of buyers, the price and quality of a product are not determined by any single buyer or seller but by all buyers and sellers as they interact in the market place. There are also markets that are not perfectly competitive. Some markets have only one seller, and this seller sets the price. Here, the seller is a monopolist. Some markets fall between the extremes of perfect competition and monopoly. Such markets are not perfectly competitive.