Problem Set #4 Economics 105 Name Let's practice more....Changes in Demand or Supply Consider the market for Minivans ...... for each of the events listed below (questions 1 -5). identify if: a. supply or demand is affected, b. if there is an increase or a decrease in demand or supply. and 1:. identify which of the determinants (if any) affect the change. Please draw the demandlsupply diagram and show the effect on the price and quantity of minivans. 1. Event: People decide to have more children. What happens to price? Quantity? Draw demandisupply diagram below 2. Event: A strike by steelworkers raises prices. What happens to price? Quantity? Draw demand/supply diagram below. 3. Event: Engineers develop new automated machinery for the production of minivans. What happens to price? Quantity? Draw demand/supply diagram below. 4. Event: The price of sports utility vehicles (SUVs) rises (assume SUVs are substitutes for minivans). What happens to price? Quantity? Draw demand/supply diagram below.5. Event: A stock market crash lowers peoples' wealth. Assume Minivans are a Normal good. What happens to price? Quantity? Draw demandfsupply diagram below. Changes in Both Demand and Supply (please read below, a problem follows) The problems above considered what would have happened if supply or demand changed. But life is more complex than this. To provide a more realistic analysis, we need to examine what happens when supply and demand both shift at the same time. SuppOSe in the market for hamburgers, both the demand and the supply for hamburgers increases (demand increases becaUSe are deemed healthier than once thought, and supply increases because a new technology make the processing of beef cheaper). What happens to market equilibrium price if both the supply curve and the demand curve increase? This is a favorite question of teachers because the answer is "it depends". How can an answer to a text question depend? We have been taught all our lives that in school (not necessarily life) there is an answer to every question. However, in economics the answer often depends on the context of the question and when both supply and demand shift right, or increase, then the answer of what happens to equilibrium price is unknown without more information. To begin this discussion let's look at the market for hamburgers. We will shift both supply and demand to the right (increase them) However, before you look at the graph. you must consider how far we are going to shift each of the curves. To give you an example, in the graph below I have shifted the demand curve right (once), but I have shifted the supply curve right three different times. The reason I have done this is to show you that depending on the size (magnitude) of the shift, the resulting equilibrium price can be at three different levels. Burke! for New The result of an increase in s s, n BOTl-l supply and demand is 8: ambiguous. It depends on the magnitude of the shifts. First consider 81 (the smallest shift), this results in an equilibrium price that is greater then the original equilibrium price (Pu>P*). If we shift out supply a little more 101 to 82, then our equilibrium price will not 1) change, it will still be P\" (this happens if both supply and demand shift out the same amount). Finally, the S3 curve Gui-r shows us the largest shift, which results in an equilibrium price lower than the original (Pd