In addition to doing the algebra and comparing equilibrium price and quantity to the results of problem 1 (the base case ), you should try to provide possible explanations for the shift of demand and supply curves from the base case.
Of course, you should also be able to draw graphs of the shifts.
Draw the curves as accurately as possible (graph paper helps).
Represent the lines of the base case by solid lines,
and the shifted line or lines by dashed lines
All problems fit the model of solving for equilibrium seen in the first problem:
Substitute the equilibrium price into either the supply or demand equation to find that
Note that the supply curve has changed. At the same value for P, more will be supplied -- we have an increase in supply.
Draw your graph very carefully here -- note that the supply line will shift downward on the graph. This indicates that producers are willing to charge less for their products.
The downward shift of the line is due to a fall in the costs of production, whether due to a drop in wages or raw materials prices or an improvement in the technology of production.
The mathematical solution for the new equilibrium follows the same pattern:
Substitute the equilibrium price into either the supply or demand equation to find that
Note that the demand curve has changed. At the same value for P, more will be demanded -- we have an increase in demand.
The upward shift of the line is due to consumers being willing to pay more for the product -- perhaps they have higher incomes, or perhaps the prices of substitutes for the good have also increased.
The mathematical solution for the new equilibrium follows the same pattern:
Substitute the equilibrium price into either the supply or demand equation to find that
Note that with an increase in demand , we see:
Note that this time, both demand and supply have increased.
What will happen to the new equilibrium price and quantity?
Answer:
Compared to problem 1, price and quantity have both increased.
Note however that the shift in supply means that compared with problem 4,
price has increased less and quantity has increased more.
Note that this time, both demand and supply have increased.
However, supply increases more than in problem 4.
What will happen to the new equilibrium price and quantity?
Answer:
The supply curve has shifted just enough to keep the price exactly the same as in question 1
and as a result of both the supply and demand shifts, quantity has increased greatly to 960.
Note that this time, both demand and supply have increased.
However, supply increases more than in problem 4 or problem 5.
What will happen to the new equilibrium price and quantity?
Answer:
The price falls as compared to problem 1;
and as a result of both the supply and demand shifts, quantity has increased still more greatly, to 1080.
Moral of problems 4, 5 and 6:
When both demand and supply increase, we can be sure that quantity will increase.
-- but we are uncertain whether price will increase or decrease, unless we are given a specific set of equations for supply and demand.
Note that price is down even more as a result of the increase in supply, but quantity does not fall as far as in problem 7.
Note that price is down even more as a result of the increase in supply, but quantity is just the same as in problem 1.