Question

In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events. In each case, show the effect on equilibrium price and quantity. a. The price of tacos increases. b. All hamburger sellers raise the price of their french fries. c. Income falls in town. Assume that hamburgers are a normal good for most people. d. Income falls in town. Assume that hamburgers are an inferior good for most people. e. Hot dog stands cut the price of hot dogs.

Short answer

Answer: An increase in the price of tacos makes hamburgers more relatively attractive, causing the demand for hamburgers to increase. This results in a rightward shift of the demand curve, and both the equilibrium price and quantity of hamburgers will increase.

Step-by-step solution

Scenario 1: The price of tacos increases

Since tacos can be considered a substitute good for hamburgers, an increase in the price of tacos makes hamburgers more relatively attractive. Therefore, the demand for hamburgers will increase. This causes the demand curve to shift rightward. As a result, equilibrium price and quantity of hamburgers will both increase.

Scenario 2: Hamburger sellers raise the price of their french fries

If french fries and hamburgers are considered complementary goods, raising the price of french fries may make customers less likely to buy hamburgers. This would lead to a decrease in demand for hamburgers, causing the demand curve to shift leftward. The equilibrium price and quantity of hamburgers would both decrease.

Scenario 3: Income falls in town, hamburgers are a normal good

If hamburgers are considered a normal good, a decrease in income will lead to a decrease in demand for hamburgers. This causes the demand curve to shift leftward. Consequently, the equilibrium price and quantity of hamburgers will both decrease.

Scenario 4: Income falls in town, hamburgers are an inferior good

If hamburgers are considered an inferior good, a decrease in income will actually lead to an increase in demand for hamburgers. This will cause the demand curve to shift rightward. Therefore, the equilibrium price and quantity of hamburgers will both increase.

Scenario 5: Hot dog stands cut the price of hot dogs

Since hot dogs can be considered a substitute good for hamburgers, a decrease in the price of hot dogs makes hamburgers less relatively attractive. This leads to a decrease in demand for hamburgers, causing the demand curve to shift leftward. As a result, the equilibrium price and quantity of hamburgers will both decrease.

Key concepts

Substitute Goods

Substitute goods are products that can replace each other in use or consumption. When the price of one good rises, you're more likely to buy its substitute. In our example, hamburgers and tacos are substitute goods.
If the price of tacos goes up, people might turn to hamburgers instead, as they become a more cost-effective option. This shift increases the demand for hamburgers. This is shown as a rightward shift in the demand curve on a graph.
When the demand curve shifts to the right, both the equilibrium price and quantity for hamburgers increase, as consumers are now more willing to buy hamburgers instead of the more expensive tacos.

Complementary Goods

Complementary goods are those that are typically consumed together, like hamburgers and french fries. When you consume one, you often consume the other. So, the price change in one can affect the demand for the other.
In the scenario where the price of french fries increases, buying fries along with hamburgers becomes less appealing. As a result, the demand for hamburgers decreases, leading to a leftward shift in the demand curve.

• The equilibrium price for hamburgers decreases because fewer people want to buy hamburgers at the previous price.
• The equilibrium quantity also drops as a consequence of reduced demand.

In this case, changes in the price of complementary goods can ripple through to alter the demand for related goods.

Normal Goods

Normal goods are those that people tend to buy more of as their income increases. Conversely, when income falls, demand for normal goods decreases. In our example, if hamburgers are considered a normal good, then a drop in income would lead to less demand for them.
This is illustrated by a leftward shift in the demand curve when people's incomes decline, impacting consumer purchasing power.
With the reduced demand for hamburgers, both their equilibrium price and quantity fall. This scenario underscores the relationship between consumer income and their purchasing choices for normal goods.

Inferior Goods

Inferior goods are those that people buy more of as their income goes down. Interestingly, when they have less money to spend, inferior goods become more popular. If hamburgers fall into this category, a fall in income results in increased demand for them.
The demand curve shifts to the right as more people opt for these cost-effective hamburgers instead of costlier options.
Consequently, both the equilibrium price and quantity rise. This illustrates how the classification of goods as "inferior" can alter consumer behavior, especially during economic downturns or when incomes drop.

Equilibrium Price and Quantity

Equilibrium price and quantity refer to the point where the demand for a good equals its supply. It's like a balance where the market is stable. For hamburgers, any change in demand, whether due to substitute or complementary goods or changes in income, affects this balance.
For example, if demand increases because hamburgers substitute a pricier taco, both equilibrium price and quantity increase. However, if demand falls because fries, a complementary good, are more expensive, the equilibrium price and quantity lower.

• When demand rises: rightward shift, more sold at higher prices.
• When demand falls: leftward shift, less sold at lower prices.

This balance is constantly adjusting, based on shifts in consumer preferences and external market factors.