Draw supply-and-demand diagrams for market A for each of the...

Draw supply-and-demand diagrams for market $A$ for each of the following. Then use your diagrams to illustrate the impact of the following events. In each case, determine what happens to price and quantity in each market. a. $A$ and $B$ are substitutes, and the price of good $B$ rises. b. $A$ and $B$ satisfy the same kinds of desires, and there is a shift in tastes away from $A$ and toward $B$. c. $A$ is a normal good, and incomes in the community increase. d. There is a technological advance in the production of good $A$ e. $B$ is an input used to produce good $A$, and the price of $B$ rises.

Draw supply-and-demand diagrams for market $A$ for each of the following. Then use your diagrams to illustrate the impact of the following events. In each case, determine what happens to price and quantity in each market.
a. $A$ and $B$ are substitutes, and the price of good $B$ rises.
b. $A$ and $B$ satisfy the same kinds of desires, and there is a shift in tastes away from $A$ and toward $B$.
c. $A$ is a normal good, and incomes in the community increase.
d. There is a technological advance in the production of good $A$
e. $B$ is an input used to produce good $A$, and the price of $B$ rises.

Key Concepts

Input Prices and Production Costs

The cost of inputs, which are essential for production, affects the supply of a good. An increase in the price of an input raises production costs, causing a leftward shift in the supply curve and leading to an increase in equilibrium price and a decrease in equilibrium quantity, assuming demand remains unchanged.

Technological Advancements

Technological progress in the production process typically increases production efficiency, thereby reducing production costs. This improvement generally causes the supply curve to shift rightward, leading to a lower equilibrium price and a higher equilibrium quantity.

Normal Goods and Income Effects

For normal goods, an increase in consumer income leads to a higher demand at every price level. This relationship, known as the income effect, shifts the demand curve outward, resulting in higher equilibrium prices and quantities in the market.

Effect of Substitutes on Demand

When two goods are substitutes, an increase in the price of one leads to an increase in the demand for the other. This concept shows how consumer preference can shift demand from one product to another, modifying the equilibrium outcome in the affected market.

Supply and Demand Diagrams

These diagrams represent the relationship between the price of a good and the quantity supplied and demanded. They provide a visual framework to analyze how different events shift supply or demand curves, leading to changes in market equilibrium price and quantity.

Shifts in Tastes and Preferences

Changes in consumer tastes and preferences can shift the demand curve. If consumers start preferring one good over another, the demand for that good increases while the demand for the alternative decreases, influencing the equilibrium price and quantity.

Transcript

00:01 I have drawn five different supply and demand graphs here because we are going to look at five different examples of what can happen in the market for a good, assuming something in the production changes, or even something in a substitute or complement good changes.

00:19 So in the first example, we say that a and b are substitutes and the price of b rises.

00:26 What happens to good a? well, when the price of a substitute good increases, it means that people will be driven away from the substitute good and driven towards our good, which will increase the demand for good a.

00:44 We can see based on the graph that this will increase the quantity of good a and increase the price of good a.

00:52 And that is exactly what our economic theory would predict.

00:57 When demand increases, price increases, and quantity increases.

01:06 In our second example, if a and b satisfy the same kinds of desires, but there is a shift in taste away from a and toward b.

01:17 So this is the opposite example.

01:19 There is a substitute good b, but people are starting to, want to be more and want a less.

01:27 This will be a decrease in demand for good a.

01:32 This will lower price, lower quantity, and we can write that down here, that when, excuse me, when demand decreases, it will lead to a decrease in price and a decrease in quantity.

02:00 In our third example, if a is a normal good and income increases.

02:11 A normal good means that as income increases, people will want more of it.

02:17 This is in contrast with an inferior good, where if income increases, people want less of it.

02:23 Think of an inferior good as being something like top ramen and a normal good being something like really nice food or something...

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