How do the following affect the equilibrium price and quantity? Show graphically.
(1) A change in consumers' tastes in favour of the product
(i) A reduction in consumers' income
(m) An increase in the price of complementary goods.
Answers
Answer: Explanation:
*There is a four-step process that allows us to predict how an event will affect the equilibrium price and quantity using the supply and demand framework.
*Step one: draw a market model (a supply curve and a demand curve) representing the situation before the economic event took place.
*Step two: determine whether the economic event being analyzed affects demand or supply.
*Step three: decide whether the effect on demand or supply causes the curve to increase (shift to the right) or decrease (shift to the left) and to sketch the new demand or supply curve on the diagram.
*Step four: identify the new equilibrium price and quantity and then compare the original equilibrium price and quantity to the new equilibrium price and quantity.