Question

How would each of the following affect the market for denim jeans in the United States? Illustrate each answer with a supply-and-demand diagram. a. The price of denim cloth increases. b. An economic slowdown in the United States causes household incomes to decrease.

Short answer

a. An increase in the price of denim cloth will cause a shift in supply to the left, leading to a higher equilibrium price and lesser equilibrium quantity. b. An economic slowdown causing a decrease in household incomes lead to a decrease in demand for denim jeans, shifting the demand curve leftwards, resulting in lower equilibrium price and quantity.

Step-by-step solution

Identify the Impact of Increased Denim Cost

Draw a supply and demand diagram with the quantity of jeans on the x-axis and the price on the y-axis. An increase in the price of denim cloth would cause a decrease in supply, since denim cloth is a major input in jeans production. Hence, denim suppliers would be less inclined to produce the same quantity at the original price. This will shift the supply curve to the left, leading to an increase in equilibrium price and decrease in equilibrium quantity.

Illustrate Impact of Economic Slowdown

Draw another supply and demand diagram with quantity of jeans on the x-axis and price on the y-axis. An economic slowdown is likely to decrease consumers' disposable income, making them more hesitant about spending money on items such as jeans. This decrease in income will lead to a decrease in demand, shifting the demand curve to the left. This results in a decrease in equilibrium price and quantity.

Key concepts

Supply and Demand Diagram

Understanding the supply and demand diagram is crucial for analyzing market dynamics. The diagram features two intersecting lines on a graph where the x-axis represents quantity and the y-axis represents price. The upward-sloping line indicates the supply curve, showing the relationship between the price of an item and the amount that producers are willing to supply. Conversely, the downward-sloping line represents the demand curve, depicting how the quantity demanded changes with price.

When it comes to denim jeans, the supply curve might shift if the price of denim cloth increases. If denim becomes more expensive, producers can't afford to make as many jeans without raising prices, so the supply curve will shift to the left. Visually, this would be represented on the graph as the supply curve moving leftward from its original position. Through this clear visual representation, students can easily grasp how changes in production costs impact supply.

Economic Slowdown

An economic slowdown refers to a period when the economy grows at a slower rate than expected, often leading to decreased consumer spending power. In the context of denim jeans, an economic slowdown would likely result in households having lower disposable income. This has a direct impact on their spending habits; consumers may prioritize essential items over discretionary spending.

As incomes decline, the demand for non-essential items such as jeans will typically decrease. This change is illustrated on the supply and demand diagram by a leftward shift in the demand curve. The intersection point between supply and demand curves—the equilibrium—will shift, showing a lower equilibrium price and quantity for jeans. This real-world scenario helps students understand the broader economic implications of a slowdown on consumer behavior and market demand.

Equilibrium Price and Quantity

Equilibrium price and quantity represent the point where the supply of goods matches demand. At this intersection on the supply and demand diagram, the market is said to be at equilibrium, with no tendency for the price to change because buyers and sellers reach a consensus.

For the denim jeans market, equilibrium changes can be caused by shifts in either the supply or demand curves. An increase in the cost of denim cloth, as well as a decrease in consumer purchasing power, both have repercussions. In the case of higher production costs, the equilibrium point will show an increased price and a reduced quantity of jeans sold. During an economic slowdown, the equilibrium would reflect a lower price and quantity. Understanding these changes in equilibrium helps students predict how market forces can alter market outcomes and it enhances their ability to analyze economic trends.