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Demand Curve

In: Business and Management

Submitted By almightyromil
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Chapter 2
The Basics of Supply and Demand


Questions for Review

1. Suppose that unusually hot weather causes the demand curve for ice cream to shift to the right.
Why will the price of ice cream rise to a new market-clearing level?
Suppose the supply of ice cream is completely inelastic in the short run, so the supply curve is vertical as shown below. The initial equilibrium is at price P1. The unusually hot weather causes the demand curve for ice cream to shift from D1 to D2, creating short-run excess demand (i.e., a temporary shortage) at the current price. Consumers will bid against each other for the ice cream, putting upward pressure on the price, and ice cream sellers will react by raising price. The price of ice cream will rise until the quantity demanded and the quantity supplied are equal, which occurs at price P2.

Copyright © 2013 Pearson Education. Inc. Publishing as Prentice Hall.

Chapter 2

The Basics of Supply and Demand

2. Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold:
a. An increase in the price of margarine.
Butter and margarine are substitute goods for most people. Therefore, an increase in the price of margarine will cause people to increase their consumption of butter, thereby shifting the demand curve for butter out from D1 to D2 in Figure 2.2.a. This shift in demand causes the equilibrium price of butter to rise from P1 to P2 and the equilibrium quantity to increase from Q1 to Q2.

Figure 2.2.a
b. An increase in the price of milk.
Milk is the main ingredient in butter. An increase in the price of milk increases the cost of producing butter, which reduces the supply of butter. The supply curve for butter shifts from
S1 to S2 in Figure 2.2.b, resulting in a higher equilibrium price, P2 and a lower

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