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25.10.

2011

Economics Konstantin Frank

1. The law of supply states that if the price of a product increases, so does the supply, meaning the quantity produced increases with the price of it. A movement along the supply curve is determined by a change in price of the product itself, a shift of the supply curve is caused by a non-price determinant, moving the curve either to the left or to the right. 2. 1. The market for bread

Supply 2

Supply 1

Q2

Q1

As the price for wheat increased, the producers have to pay more to produce the same amount of bread. So the supply curve shifted to the left and the quantity Q1 shifted also to Q2. Linking supply and demand we get following diagram, showing that the market equilibrium shifted from Qe/Pe to Qe1/Pe1.

25.10.2011

Economics Konstantin Frank

Supply 2

Supply 1

Demand

Pe1 Pe

Qe1

Qe

2.2 The market for corn Corn is a substitute for wheat. As the price for wheat increased, more people will buy corn, as it is cheaper than wheat. The quantity demanded increases, though the price remains the same. This shifts the demand curve to the right. The supply curve remains the same, but as the demand increased, more will be supplied so the market equilibrium righted itself from the point Qe/Pe to Qe1/Pe1.

25.10.2011

Economics Konstantin Frank

Demand 1

Demand 2

Supply

Pe1 Pe

Qe

Qe1

3. The law of demand states, that the quantity demanded for a product increases when the price of the product falls. Meaning that a product which costs much will be demanded fewer than a product that is cheap. A movement along the demand curve is caused by the decrease or increase of the price itself. A shift of the demand curve is caused by non-price determinants moving the demand curve either to the right or the left.

25.10.2011

Economics Konstantin Frank

4 a) Demand 1 Demand 2

Q1

Q2

Hot chocolate is a product, which most people will consume when it is cold. It is seasonal. If the weather gets severely cold, people demand a hot drink and something that contains much energy to keep them warm, so hot chocolate is ideal for cold days. As the weather got cold more people demand a hot chocolate, though the price remained the same. This caused a shift of the demand curve to the right.

25.10.2011

Economics Konstantin Frank

4 b) Demand 1 Demand 2

Q2

Q1

An article in the newspaper, stating that chocolate is the main reason for people to gain weight is very bad publicity. Most people will avoid chocolate from this point on and so the demand for hot chocolate, which is mainly consisting of the harmful chocolate will decrease, though the price remains the same, causing the demand curve to shift to the left.