Answer to Question #232233 in Macroeconomics for Nana

Question

Use a supply and demand diagram for a specified competitive market to demonstrate the effect of the specific shocks given in the cases below on the equilibrium price and quantity. Clearly explain the key adjustments in demand and supply curves that result. Show whether there is a shift in the demand curve, the supply curve or neither.
a) An abrupt heat wave smashes the city of Lusaka. Show the effect in the ice cream market in Lusaka.
b) Authorities impose a tax on ice cream to be paid by producers. How does this affect ice cream market?
c) We are told that Kenya and Madagascar are major producers of cotton. Madagascar workers decide to go on strike. Show the effect on the market for Madagascar cotton.
d) Illustrate the effect of the situation described in part c) on the market for Kenya cotton.
e) In the command economy, the authorities impose a price cap on canned Fanta. Show the effect in the canned Fanta market

Answer 1

Question a.

The ice cream’s equilibrium quantity and the price will increase. Equilibrium quantity will increase from Q0 to Q1. The equilibrium price will increase from P0 to P1. The demand curve will shift rightward from Do to D1 as shown in the graph. 

Question b.

The ice cream’s equilibrium quantity will go down and the equilibrium price will go up. The quantity will decrease from Q0 to Q1. The price will increase from P0 to P1. The supply curve will shift leftwards from S0 to S1. The price will rise from Po to P1 as shown in the graph. 

Question c.

The supply curve will shift leftwards. The equilibrium price will go up from P0 to P1. The equilibrium quantity will go down from Q0 to Q1. Thus, a lower quantity of Madagascar cotton (Q1) would be sold at a higher price (P1) as shown in the graph. 

Question d.

Kenya’s demand curve for cotton will shift rightward. Both the equilibrium price and quantity will increase. Thus, Kenya will sell a larger quantity of cotton (Q1) at a higher price (P1). Kenya’s demand curve would shift from Do to D1 as shown in the graph.

If the price cap is below the equilibrium point (at P0), the supply of bottled water will go down. Consumers will not get the volume of water they need. The quantity of bottled water in the market will be less by $Q0-Q1$. Q0 is the quantity demanded with a price cap. Q1 is the quantity supplied with a price cap. If the price cap is above the equilibrium (at P1), there will be an excess supply by $Q2-Q3$ as shown in the graph.