microeconomics - frameworks

Question 1

How does an increase in demand for Good X affect its market?

(PAP)

Answer 1

1. demand factor (F-EGYPT) & explain how it leads to increase in demand
2. as such, demand increases for dd1 to dd2, as reflected by the rightward shift of the demand curve.
3. consequently, a shortage of QdQs is created. this creates an upward pressure on prices
4. as price increase, quantity demanded decreases along DD1 to E1
5. while quantity supplied increases along SS to E1
6. A new market equilibrium of E1 is established via the price adjustment process
7. the net effect is an increase in price by P0P1 and an increase in quantity by Q0Q1

Question 2

How does an increase in supply of Good X affect its market?

Answer 2

1. supply factor (WETPIGS) + explain how it leads to an increase in supply of the good
2. as such, supply increases from SS0 to SS1, as reflected by the rightward shift of the supply curve
3. consequently, a surplus of QsQd is created, which exerts a downward pressure on prices
4. as prices decrease, quantity demanded increase along DD to E1
5. while quantity supplied decreases along SS1 to E1
6. via the PAP, a new market equilibrium is established at E1
7. the net effect is a decrease in prices by P0P1 and an increase in quantity by Q0Q1

Question 3

Explain the price adjustment process.

Answer 3

1. Initially, the market equilibrium is E0, where price is at P0 and quantity is at Q0
2. If there were to be an increase in the demand for apples, there will be a rightward shift of the demand curve from DD0 to DD1, meaning more dollar votes are cast for apples.
3. consequently, a shortage of QdQs is created, which thus exerts an upward pressure on price
4. this will signal to producers to allocate more resources to increase production to Q1, due to the incentive of earning greater profits. the quantity supplied of apples increase from Q1 to Q2
5. when producers choose to allocate more resources to the production of apples, they will need to channel limited resources away from the production of another good, leading to the incurrence of opportunity costs.
6. assuming producers are profit-motivated, they will be incentivised to adopt the least costly method of production in order to compete for consumers’ dollar votes
7. hence, price determines what and how to produce