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Chapter 4: Q. 33 (page 106)

Whathappenstothepriceandthequantityboughtandsoldinthecocoamarketifcountriesproducingcocoaexperienceadroughtandanewstudyisreleaseddemonstratingthehealthbenefitsofcocoa?Illustrateyouranswerwithademandandsupplygraph.

Short Answer

Expert verified

It leads to decrease in supply and increase in demand, finally implying increase in market price & decrease in market quantity.

Step by step solution

01

Concept of Decrease in Supply 

Countries producing cocoa experience drought - leads to decrease in production capacity & supply. It shifts supply curve leftwards.

02

Concept of Increase in Demand 

A new study demonstrating health benefits of cocoa - leads to increase in demand due to favourable change in taste & preferences. It shifts the demand curve rightwards.

03

New Equilibrium Explanation 

Previous equilibrium is at E, at demand & supply intersection, with equilibrium price & quantity = P & Q*

It is assumed that increase in demand = decrease in supply

Corresponding increase & rightward shift in demand (to D') and decrease & leftward shift (to S') in supply leads to situation of excess demand. It creates competition among buyers and increases equilibrium price (to P'). However, at the new equilibrium E' (where new D' & S' intersect) - the equilibrium quantity remains same at Q*

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Most popular questions from this chapter

If the government imposed a federal interest rate ceiling of 20% on all loans, who would gain and who would lose?

Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers.

a. The number of people at the most common ages for home-buying increases.

b. People gain confidence that the economy is growing and that their jobs are secure.

c. Banks that have made home loans find that a larger number of people than they expected are not repaying those loans. d. Because of a threat of a war, people become uncertain about their economic future.

e. The overall level of saving in the economy diminishes.

f. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.

Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers.

  1. The number of people at the most common ages for home-buying increases.
  2. People gain confidence that the economy is growing and that their jobs are secure.
  3. Banks that have made home loans find that a larger number of people than they expected are not repaying those loans.
  4. Because of a threat of a war, people become uncertain about their economic future.
  5. The overall level of saving in the economy diminishes.
  6. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.

Suppose that a 5% increase in the minimum wage causes a 5% reduction in employment. How would this affect employers and how would it affect workers? In your opinion, would this be a good policy?

Select the correct answer. A price floor will usually shift: a. demand b. supply c. both d. neither Illustrate your answer with a diagram
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