Tuesday, May 24, 2016

143. A previous exam question Eco 1A

A) The red meat indutry ebark on a massive advertising campaign. Indicate how this will affect the market demand for red meat?

Advertising increases (or hopes to increase) the number of customers. The demand curve will thus move to the right which will signify an increase in demand.

B) What will happen to the supply and demand of red meat and chicken if there is a drought that severely reduces the supply of red meat on the market?

A decrease in the supply of red-meat will cause a decrease in the SUPPLY of red meat - a shift of the supply curve to the left - and since chicken is a substitute (can be used instead of red meat) it will lead an INCREASE in the demand for chicken. a shift of the demand curve to the right.

If you draw the supply and demand curves it means there will be a shift to the left in the SUPPLY of red meat on the one graph – the red meat market (which means an increase in PRICE of red meat; and because it is so expensive less people will purchase it. Because chicken is a substitute more people will enter the chicken market – this is shown in the market for chicken graph as a shift to the right of the demand curve – which will lead to an increase in chicken prices AND an increase in the quantity of chicken traded.

Now in Q 3.3 it says that the red meat guys reduce the price – so you are right: “On question 3.3. am I correct in saying that the decrease in red-meat PRICE (substitute for chicken) will cause an INCREASE in the QUANTITY demanded in red meat (a movement along the demand curve) and a decrease in the demand (a shift to the left of the demand curve) for chicken?”

So yes you are right – make sure that you understand movements along a curve because of price changes and shifts of the curve because of changes in the price of compliments and substitutes !

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