Answer to Question #290285 in Microeconomics for Sachita

Question

a. Suppose the price of sugar decreases. Then, will there be a shortage or surplus in the tea leaf market? Explain with a diagram.

b. Suppose there is an increase in the wage of tea farmers. Then, will there be a shortage or surplus in the tea market? Explain with a diagram.

c. How will the market clearing price and the equilibrium quantity be affected by these changes?

Explain in detail with diagram.

Answer 1

a. Suppose the price of sugar decreases. Then, will there be a shortage or surplus in the tea leaf market? Explain with a diagram.

Sugar and tea are complementary goods. When the price of a good that complements good decreases, then the quantity demanded of one increases, and the demand for the other increases. If the price of sugar decreases, there will be high demand for tea which increases the demand for tea leaves. This high demand causes a shortage of tea leaves in the market.

With the decline in the price of complementary goods, DD, the initial demand curve, has shifted to the right to D'D', and demand for the commodity has increased from OQ to OQ1.

As shown in the diagram below:

 

 

b. Suppose there is an increase in the wage of tea farmers. Then, will there be a shortage or surplus in the tea market? Explain with a diagram.

The price is the amount received by the producer for selling one unit of a good or service. A price increase usually results in an increase in the quantity of that good or service supplied, whereas a price decrease results in a decrease in the quantity supplied. If tea farmers receive more wages, they will produce more tea thus causing a surplus in the market.

As shown in the diagram below, if the price increases from p₁ to p₂, the amount of production will increase from Q₁ to Q₂.

c. How will the market-clearing price and the equilibrium quantity be affected by these changes?

When there is no scarcity or surplus of a product on the market, it is said to be in equilibrium quantity. When supply and demand collide, the amount of an item that customers desire to buy is equal to the amount that producers are willing to supply. Prices tend to decrease to a lower equilibrium price and a greater equilibrium quantity of goods and services when supply for goods and services increases while demand remains constant.

An increase in demand is a situation under which the demand curve shifts to the right due to other factors i.e. decrease in the price of complementary goods. If the price of sugar reduces, the equilibrium will shift from E to K.

When price increases the equilibrium will move from Q₀ to Q₁ as shown in the diagram below: