Answer to Question #166342 in Microeconomics for Bubblys

Question

Recent medical research has established that drinking wine in moderation can improve heart health and lead to a longer life. Explain the impact of this medical research on the equilibrium price and quantity of wine. Your explanation will be in terms of shifts in demand or supply (or both, or neither) and the effects of any shift. Describe the process by which the shift moves us to a new equilibrium price and quantity of wine.

Answer 1

Let's consider the long-run and short-run periods.

A. Short-run period

In short-run period the suppliers can not change production function parameters such as labour worked or equipment. Hence, supply curve in axex unit price (vertical axis) and quantity (horizontal axis) will not be shifted.

Also it is necessary to consider the demand curve. Initially we should underscore that there are two types of consumer: people who drinks a big amount of wine (1st group) and people who do not drink wine due to healthcare reasons (2nd group). The aforementioned medical research can dramatically increase the consumption of 2nd group. Hence, the demand curve in axes unit price (vertical axis) and quantity (horizontal axis) will be shifted to right side (quantity demanded will grow and price will not be changed due to additional demand). Hence, the equilibrium price and quantity will be greater after the aforementioned research in short-run.

B. Long-run period

If the type of competitiveness is similar to perfect, there is a big amount of producers can shift the supply curve to right side and equilibruim price will be turn to initial level (before research). If the type of competitiveness is similar to monopoly, the supply function will not be changed (it can be even shifted by monopoly to up after the research in short-run and after that will not be changed in long run).

ANSWER

a) Price and quantity will be rather greater than that of before research (in short-run)

b) In perfect competition market price will not be changed and quantity will be greater (in long-run)

c) In monopoly market quantity will not be changed, the price will be greater (in long-run).