Consider the following events: Scientists reveal that eating...

Name: Problem 9, Chapter 4: Principles of Macroeconomics
Uploaded: 2019-04-22T05:29:38-08:00
Duration: 3 min 54 s
Channel: Yi Chun Lin
Description: Consider the following events: Scientists reveal that eating oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees produce more oranges. Illustrate and explain what effect these changes have on the equilibrium price and quantity of oranges.

Consider the following events: Scientists reveal that eating oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees produce more oranges. Illustrate and explain what effect these changes have on the equilibrium price and quantity of oranges.

Key Concepts

Supply Shift

A supply shift is observed when a non-price factor (like technology or production methods) improves the production process, allowing producers to supply more at every price level. The introduction of a new fertilizer increases orange production, shifting the supply curve to the right. This typically results in a lower equilibrium price due to greater availability, and also increases the equilibrium quantity.

Simultaneous Shifts in Supply and Demand

When the demand and supply curves shift at the same time, the overall effect on equilibrium quantity is generally an increase, since both curves shifting right suggest a greater quantity is traded. However, the effect on the equilibrium price becomes ambiguous as the rightward shift in demand tends to raise prices while the rightward shift in supply tends to lower them; the net change in price depends on the relative magnitudes of these shifts.

Supply and Demand Model

The supply and demand model provides a framework for understanding how market equilibrium is determined by the intersection of the supply and demand curves. It analyzes how shifts in either curve, caused by various external factors, affect the equilibrium price and quantity in the market.

Demand Shift

A demand shift occurs when a change in a non-price determinant of demand (such as consumer tastes, income, or external information) causes the entire demand curve to move. In this context, scientific findings that link orange consumption to decreased risk of diabetes boost consumer preference for oranges, shifting the demand curve to the right, which tends to raise the equilibrium quantity and exert upward pressure on the equilibrium price.

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