Answer to Question #309544 in Microeconomics for Fahrul Iqbal

Question

 Explain each of the following statements using supply and demand diagrams.

a. When there is a drought in southern Europe, the price of soft fruit rises in supermarkets throughout Europe.

b. When a report is published linking a product with an increased risk of cancer, the price of the product concerned tends to fall.

c. The United States announces that it intends to impose new sanctions on the Islamic Republic of Iran. The price of petrol in Europe rises and the price of a used Mercedes falls.

Answer 1

Answers

(a) A drought will lead to reduction in the soft fruits produce. This will shift the supply curve to the left indicating the reduced supply in the market. This shift will cause the quantity demanded to reduce and the price to increase as shown in the diagram below.

(b) The linking of a product with cancer will lead to a reduction in its demand and thus the demand curve will shift to the left. This will lead to reduction in both quantity demanded and price as shown in the diagram below.

(c) The imposing of sanctions on Iran would lead to a reduction in supply of oil and thus the supply curve for Petro will shift to the left. This will lead to reduction in quantity demanded and an increase in price.

Cars and Petro are complementary goods and thus a reduction in quantity demanded for Petro will lead to reduction in demand for cars. This will also shift the demand curve for used Mercedes to the left causing a fall in both price and quantity demanded.