Hello, I'm having trouble with all the questions here, especially when it comes to plotting supply and demand curves, as I am new to Econ. I need the most help with Q1 and Q2. How do you plot...
Hello, I'm having trouble with all the questions here, especially when it comes to plotting supply and demand curves, as I am new to Econ. I need the most help with Q1 and Q2. How do you plot supply and demand curves?
Thanks a bunch.
The basic idea of a demand curve is that in order to sell more of a good, you must reduce the price so that more people will be willing to buy it. So if we make a graph of the price (P) people are willing to pay as a function of the quantity (Q) they are willing to buy, we will get a downward-sloping curve.
The basic idea of a supply curve is that in order to produce more of a good, you must raise the price to cover the increasing marginal cost of production. So if we make a graph of the price (P) at which companies are willing to sell a good as a function of the quantity (Q) they must produce, we get an upward-sloping curve.
There are many exceptions to both of these general patterns in the real world, but as a general rule, demand curves usually slope downward and supply curves usually slope upward.
The point at which the two curves intersect is the equilibrium; it is the price and quantity for which the amount people want to buy and the amount people want to sell are exactly equal. When buying and selling are equal in this way we say that the market clears.
Supply and demand curves can also shift, due to changes in customer choices or production costs. The curves then move to different places and we get a new equilibrium.
In this specific problem, we are given some figures for prices and quantities that each of these products sold at. If you read carefully, they also give us some hints as to whether it is the supply or the demand that is changing.
"Prices of vegetables nationwide have shot up [...] by as much as 175% due to the wet season."
Those words due to the wet season suggest that this is a supply effect---the rain is making it more costly to produce vegetables.
"the rainy spell had resulted in 40% less production"
This is also a supply effect. So we see that the supply curve has moved in such a way that the new equilibrium has a price 175% higher and a quantity 40% lower.
This is the tricky part: A shift in supply means we are along the demand curve---because it is the demand that hasn't changed. You can also remember this by seeing that price has gone up and quantity has gone down, which means we are on a downward-sloping curve.
The second part of the question gives another cause of price shifts: "since chilies are a literally hot item during festive seasons, [...] a seasonal price which is an extra 50% from the usual price." The change due to festive seasons suggests that this is a demand curve shift.
A demand curve shift means we go along the supply curve, because the supply curve is being held fixed.
I've made a quick sketch to show basically what's happening here. the blue supply curve moves upward due to the supply effect. The red demand curve also moves upward due to the demand effect. The new intersection point is higher than the old one, indicating that the equilibrium has shifted from a lower price to a higher price.
Hopefully that helps with the first part.If you are also having trouble with the later parts about price elasticity of demand etc., I suggest asking separate questions about those parts.