Answer to Question #309192 in Microeconomics for MZSEL

Question

1. Explain the difference between decrease in demand and decrease in quantity demanded, and using any product of your choice, briefly explain three factors that can cause decreases in demand for that product. 

2. Explain the difference between a price ceiling and price floor. Use two popular examples with well-labelled diagrams to explain.

3. Assuming that the market for Frytol cooking oil is currently in equilibrium (Demand equal supply). Briefly explain with aid of well-labeled diagrams how the following events will affect the equilibrium price and quantity of Frytol (in each case, start from a new equilibrium). 

a) Average incomes fall due to COVID-19. 

b) It is discovered that Frytol oil is good for adults.

c) A tax of 1.75% is place on Frytol. 

Answer 1

1.) A decrease in demand results from other factors other than price while a decrease in quantity demanded results from increased price.

2.) Price ceilings keeps a price from rising above a certain level. Price floors keep a price from falling below a certain level. See diagram below

3.)

a) If income falls, then less quantity will be purchased, supply will decrease and this means that equilibrium price and quantity will shift to the left.

b) This will increase demand and price will fall. Supply will decreases and the equilibrium price and quantity shifts as shown:

c.) A tax will increase price and consequently decrease demand. Equilibrium price and quantity will shift as shown: