Answer to Question #194710 in Microeconomics for shabbir

Question

Consider a market for Ice Cream an inferior good in Pakistan. For each of the given events, identify which of the determinants of the demand or supply are affected. Also indicate whether demand or supply increase or decreases. Then draw a diagram to show the effect on the price and quantity of Ice Cream. 

1.News reports claim that the consumption of Ice Cream is good for the health of coronavirus patients. (1 Mark)

2. There has been a decline in wages of all employees in Pakistan due to the third wave of coronavirus. (1 Mark)

3. People in Pakistan decide to have more children. (1 Mark)  

4.  Students of NED University develop new automated machinery for the production of Ice Cream. (1 Mark)  

5.There has been a decrease in people’s income due to COVID-19 crisis. (1 Mark) 

Answer 1

(i) News report claim that the consumption of Ice Cream is good for health of coronavirus patient.  

  This will increase the demand for Ice-Cream in the market. As the demand of ice cream increases, demand curve will shift from D to D1, then equilibrium price increases from P to P1 and equilibrium quantity increases from Q to Q1

(ii) There has been a decline in wages of all employees in Pakistan due to the third wave of coronavirus.

 As the wages of employees decreases, the demand for ice cream will increase because ice cream is consider as an inferior good. So, the demand for ice cream will increase and demand curve will shift from D to D1. When demand curve shifts from D to D1 then, equilibrium price will increase from P to P1 and equilibrium quantity will also increase from Q to Q1.

(iii) People in Pakistan decide to have more children.

   If people in Pakistan decide to have more children then, the demand for ice cream will increase due to increase in population and as the demand for ice cream will increase, demand curve will shift from D to D1. When demand curve shifts from D to D1 then, equilibrium price will increase from P to P1 and equilibrium quantity will also increase from Q to Q1.

(iv) Development of new automated machinery for the production of ice cream. 

Since there is technological development in the production of the ice cream thus the cost of producing ice cream will reduce which would increase the supply of ice cream. This is shown by rightward shift in supply curve from S to S'. This leads to fall in the equilibrium price but rise in quantity of ice-cream.

(v) Decrease in people's income due to pandemic affects the demand of the inferior good ice cream. As the income of consumers decline, they tend to switch their demand to the inferior good as they are unable to prefer inferior good over normal good when income is low. This is shown by rightward shift in the demand curve from D to D'. increase in demand results in increased prices and increased quantity.