Answer to Question #196289 in Microeconomics for Asad wasay

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

Answers:

1) The demand for ice cream will increase following the news reports that claim that it (Ice Cream) is good for the health of Corona Virus patients.

2) The supply for Ice Cream will increase as a result of a decline in wages (input or overhead) of all employees in Pakistan owing to the third waves of coronavirus; it (Ice cream) will become a more cheaper to produce Ice cream as overheads will reduce.

3) The demand for Ice Cream is likely to increase when people of Pakistan decide to have more children, as Ice Cream is popular with kids.

4) The supply of Ice cream is likely to increase as a result of the development of a new automated machinery for its production increasing the capacity.

5) The decline in people's income due to Covid-19 crisis will lead to an increase in the demand for Ice Cream as it becomes a more affordable substitute to expensive goods such as chocolate or yogurt i.e. income substitution effect.

Graphical presentation both increase in demand and supply of ice cream:

NOTE:

Both the price and quantity will increase from P to P' and Q to Q' respectively.