Chapter 3: Problem 1

Illustrate each of the following events using a demand and supply diagram for bananas. a. Reports surface that imported bananas are infected with a deadly virus. b. Consumers’ incomes drop. c. The price of bananas rises. d. The price of oranges falls. e. Consumers expect the price of bananas to decrease in the future.

Short Answer

Expert verified

Short Answer: When analyzing the events affecting the demand and supply of bananas, the following effects are observed: a) Infected bananas: Supply decreases, equilibrium price increases, and equilibrium quantity decreases. b) Lower consumer income: Demand decreases, equilibrium price decreases, and equilibrium quantity decreases. c) Higher banana price: Quantity demanded decreases, and quantity supplied increases. d) Lower orange price: Demand for bananas decreases, equilibrium price decreases, and equilibrium quantity decreases. e) Expected price decrease: Current demand decreases, equilibrium price decreases, equilibrium quantity decreases, but demand may increase once the expected price decrease occurs.

Step by step solution

Event a: Reports surface that imported bananas are infected with a deadly virus

In this scenario, we can assume that the supply of bananas will decrease as people will be more hesitant to import or consume infected bananas. This will cause the supply curve to shift to the left. As a result, the equilibrium price of bananas will increase, while the equilibrium quantity demanded will decrease.

Event b: Consumers' incomes drop

When consumers' incomes drop, they have less money to spend on goods and services, including bananas. As a result, the demand for bananas will decrease. In this case, the demand curve will shift to the left. Consequently, the equilibrium price of bananas will decrease, and the equilibrium quantity supplied will also decrease.

Event c: The price of bananas rises

When the price of bananas rises, consumers will be less willing to purchase bananas at the higher price. This will lead to a decrease in the quantity demanded, moving along the demand curve. On the other hand, producers will be more willing to supply bananas at higher prices, leading to an increase in the quantity supplied, moving along the supply curve.

Event d: The price of oranges falls

If the price of oranges falls, consumers may consider oranges as a substitute for bananas. As a result, the demand for bananas will decrease, and the demand curve will shift to the left. Consequentially, the equilibrium price of bananas will decrease, and the equilibrium quantity supplied will also decrease.

Event e: Consumers expect the price of bananas to decrease in the future

If consumers expect the price of bananas to decrease in the future, they may decide to postpone their purchases. This will lead to a decrease in the current demand for bananas, causing the demand curve to shift to the left. As a result, the equilibrium price of bananas will decrease, and the equilibrium quantity supplied will also decrease. However, when the expected price decrease occurs, the demand for bananas may increase again.

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