Question

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

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.

Key concepts

Equilibrium Price

The equilibrium price is where the demand and supply curves intersect. This point represents the price at which the quantity demanded by consumers equals the quantity supplied by producers.
When the market is in equilibrium, there is no excess supply or demand. Everything produced is sold, and buyers get the exact amount they wish to purchase at that price.
For instance, in the case of an event where bananas are reported to be infected, the supply curve will shift left, indicating a decrease in supply. This shift causes the new equilibrium price to be higher because fewer bananas are available, and buyers may pay more to secure the limited supply.
It's important to note that any factor that changes either the demand or supply will typically affect the equilibrium price. This reflects how sensitive markets are to changes and how they can quickly adjust to new circumstances.

Demand Curve

The demand curve illustrates how much of a product consumers are willing to purchase at various prices. In general, the curve slopes downward from left to right, indicating that as prices decrease, consumers are likely to buy more of the product.
Numerous factors can shift the demand curve, leading to changes in consumer behavior. For example, if consumers' incomes drop, they may have less disposable income to spend on goods like bananas. This change results in the demand curve shifting left, representing a decrease in demand at every price level.
Additionally, external factors such as substitutes, consumer expectations, and changes in income all can cause the demand curve to shift. For example, if the price of a competing product like oranges falls, consumers may opt for oranges instead, leading the demand for bananas to decrease, demonstrating elasticity in consumer preferences.
Each shift in the demand curve reflects changes in consumer decisions, influenced by price, income, or perceptions.

Supply Curve

The supply curve shows the relationship between the price of a product and the amount that producers are willing to sell. Typically, this curve slopes upwards, indicating that as prices increase, producers are willing to supply more of the product.
Supply can be influenced by several factors including production costs, technology, and external events. For example, reports of bananas being infected with a virus would shift the supply curve leftward due to decreased willingness or ability to supply bananas. This reduction in supply causes fewer bananas to be offered at each possible price.
Conversely, when prices rise, such as when there are favorable market conditions, producers may find it profitable to produce more bananas, which is illustrated by a movement along the supply curve rather than a shift.
This dynamic interplay between supply and external factors keeps the supply curve flexible and highly responsive to market conditions, ensuring that producers adjust their outputs in alignment with changing demands and opportunities.