In Chapter 9 we showed how a shift in demand could be analyzed using a model of a single market. How would you illustrate an increase in the demand for good X in the general equilibrium model pictured in Figure 10.3? Why would such a shift in preferences cause the relative price of X to rise? What would happen to the market for good Y in this case? Should your discussion here be thought of as "short-run" or "long-run" analysis?
Figure 10.3
How Perfectly Competitive Prices Bring about Efficiency

Transcribed Image Text:

Quantity of Y per weelk Efficlent prices (slope -P PP С" Inltlal prices (slope -P P) Y. Ủy С" AX X* PXI Quantity of X per week