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

a) Demand curve shifts right, price and quantity increase. b) Demand curve shifts left, price and quantity decrease. c) Demand curve shifts left, price and quantity decrease. d) Demand curve shifts right, price and quantity increase. e) Demand curve shifts left, price and quantity decrease.

Step-by-step solution

Analyze the Effect of Higher Taco Prices

If the price of tacos increases, assuming that tacos are a substitute good for hamburgers, the demand for hamburgers would increase as consumers switch to hamburgers. In the supply and demand diagram, the demand curve for hamburgers would shift to the right, resulting in a higher equilibrium price and quantity for hamburgers.

Consider the Impact of Higher French Fry Prices

When hamburger sellers raise the price of french fries, which are typically a complement to hamburgers, the overall cost of a meal that includes a hamburger increases. This could lead to a decrease in the demand for hamburgers since they are less attractive without affordable french fries. The demand curve would shift to the left, leading to a lower equilibrium price and quantity for hamburgers.

Assess the Impact of Falling Incomes on Normal Goods

If income falls in town and hamburgers are considered a normal good, people would buy less of them as they cut back on expenditures. The demand for hamburgers would decrease, shifting the demand curve to the left. This would result in a lower equilibrium price and quantity for hamburgers.

Evaluate the Effect of Falling Incomes on Inferior Goods

Conversely, if incomes fall and hamburgers are viewed as an inferior good, meaning people consume more of them as their income decreases, the demand for hamburgers would increase. The demand curve would shift to the right, leading to a higher equilibrium price and quantity.

Analyze the Impact of Cheaper Hot Dogs

If hot dog stands cut the price of hot dogs, assuming hot dogs are a substitute for hamburgers, the demand for hamburgers will decrease as consumers opt for the cheaper substitute. Thus, the demand curve for hamburgers would shift to the left, resulting in a lower equilibrium price and quantity for hamburgers.

Key concepts

Equilibrium Price and Quantity

The equilibrium price is the price at which the quantity of goods suppliers are willing to supply equals the quantity of goods consumers are willing to buy. Similarly, the equilibrium quantity is the quantity of goods bought and sold at the equilibrium price. Market equilibrium occurs at the intersection of the supply and demand curves in a supply and demand diagram.

When an external event affects the market — such as a change in consumer taste, income, or the price of related goods — it can cause the demand curve to shift either to the right (an increase in demand) or to the left (a decrease in demand). This shift results in a new equilibrium price and quantity. For instance, if the price of tacos rises (assuming tacos are a substitute for hamburgers) and consumers switch to hamburgers, the demand curve for hamburgers will shift to the right, leading to a higher equilibrium price and quantity for hamburgers.

Understanding these shifts and their impacts on equilibrium are crucial for businesses and consumers in predicting market changes and making informed economic decisions.

Substitute Goods

Substitute goods are products that can be used in place of one another. When the price of a substitute good changes, it directly affects the demand for the related good. An increase in the price of a substitute, like tacos, typically causes the demand for the related good, hamburgers in this case, to increase as consumers look for an alternative.

This shift in preference can be represented on a supply and demand diagram as a rightward shift in the demand curve for hamburgers, indicating increased demand and potentially a higher equilibrium price and quantity. Similarly, when hot dog prices decrease, they become more attractive relative to hamburgers, causing the demand for hamburgers to fall, shifting the demand curve to the left and leading to a decrease in equilibrium price and quantity.

Complement Goods

Complement goods are products that are often used together, such that the consumption of one increases the consumption of the other. An example of complement goods are hamburgers and french fries.

When the price of french fries increases, the overall cost of a meal including hamburgers goes up, thus decreasing the demand for hamburgers. In a supply and demand diagram, this relationship is shown by a leftward shift in the demand curve for hamburgers once the fries become more expensive, signaling a reduction in the equilibrium price and quantity for hamburgers. Understanding complements is essential for businesses that sell bundled products, as pricing decisions for one product can significantly impact the demand for its complement.

Normal Goods

Normal goods are goods for which demand increases as consumer income rises. Conversely, demand for normal goods falls as consumer income decreases. Most products and services are normal goods, like electronics, clothing, and dining out.

In the scenario where income falls and hamburgers are a normal good, consumers will cut back on their hamburger consumption, leading to a shift to the left in the demand curve. This shift indicates a decrease in demand, resulting in a lower equilibrium price and quantity for hamburgers in the market. Recognizing goods as normal is important in predicting how changes in the economy, such as recessions or booms, will affect consumer spending patterns.

Inferior Goods

Inferior goods have an inverse relationship with consumer income: as income decreases, demand for these goods increases, and as income increases, demand for them tends to fall. These goods are typically seen as lower-quality alternatives to more expensive products.

When income falls and hamburgers are seen as an inferior good, people may purchase more hamburgers due to their lower cost, resulting in an increase in demand. This can be depicted as a rightward shift in the demand curve on the supply and demand diagram, symbolizing a higher equilibrium price and quantity for hamburgers. Understanding inferior goods helps indicate how changes in income levels can inversely affect demand for certain types of products.