Quiz 2: Demand, Supply, and Market Equilibrium


The price of California winery would change due to change in following factors: a. If price of the competitor French wine falls, the demand of the French wine will increase and demand of California wines will fall. The California wine will have to decrease its price to increase the market demand. Since California wine and French wine act as substitutes , the price and quantity of one affects the other. b. If one hundred new wineries are opened in California, the supply of wine would increase as compared to demand, the price will fall. c. If the unemployment rate decreases, this means the people are better off with high income level in the economy. There will be more demand for wine and hence the price would increase. img Graph - A.1 From above graph it is clear that increase in demand resulted into increase in price. d. Cheese and wine are complimentary goods. The increase in price of one affects the demand of other. The increase price of cheese will lead to fall in wine demand and hence prices of both wine and cheese will fall. e. The increase in price of glass bottle will increase the price of wine packing process. This will increase the general price of wine. f. A fall in production cost will result in fall in prices of wine manufacturing and distribution. The price of wine bottle will decrease. g. As wine vinegar is left over of wine process, it will have no effect on price or quantity demand of wine. h If the average age of consumer increases and the old people drink less wine, the price of wine would fall. This is because the demand of the wine would fall and the suppliers will reduce the price to induce consumers to buy more wine. It could also be observed from the graph drawn below: img Graph - A.2 From above graph it is clear that, decrease in demand resulted into fall in price of wine.

The following points explain the changes in price and demand of Florida oranges: a. A large destruction of orange trees will result in decrease in supply of oranges. The price will increase. The following graph explains fall in supply and increase in price: img Graph - A.1 b. An increase in production of oranges will increase the supply of oranges in the market. This will decrease the price of the oranges. img Graph - A.2 c. An increase in awareness about health benefits of oranges will make people consume large number of oranges. This means the demand oranges will increase. Given the supply is constant, an increase in demand of oranges will increase the price of oranges in the market. img Graph - A.3 d. If grapefruit and oranges are considered substitutes of each other, a fall in price of grapefruit will increase the demand for grape fruit and decrease the demand for oranges. To induce the customers to buy more oranges, suppliers will slash down the price of oranges and hence price of oranges will fall. img Graph - A.4

The following illustrations would help to understand the changes in demand and price: a. Given the supply is constant in short period, an increase in demand of heating oil will increase the price of heating oil. The following graph explains change in price and quantity demanded of heating oil: img Graph - A.1 From the above graph it could be observed that the increase in demand resulted into increase in price. b. A decrease in supply of RAM chips will lead to decrease in equilibrium quantity and increase in price. This is because the change in supply will not have an immediate effect on demand. img Graph - A.2 From the above graph it could be observed that decrease in supply resulted into increase in price even when demand is constant.