Demand, Supply, Shifts, Elasticity and its Application

DEMAND, SUPPLY, A SHIFT IN BOTH, ELASTICITY AND ITS APPLICATION
Student’s Name

I. QUESTION ONE
Effect of Certain Events on the Demand and Supply of Woolen Jumpers in
Australia
a. The decrease of the price of leather jackets
Economic theory has it that, a change in the price of a substitute of good causes a change
in the demand of the substitute in the same direction. That, if the price of leather jumpers
decreases as it is in this example, the demand for woolen jumpers will decrease, see.1 Therefore,
the decrease in the price of leather jumpers will attract more consumers hence leading to a shift
in the demand curve of the leather jumpers to the right as the equilibrium goes higher from E1 to
E2 as shown in Fig. 1.1. Conversely, the demand curve for the woolen jumpers shifts leftwards
because their demand decreases and consequently lowers the equilibrium from E1 to E2 as shown
in the fig. 1.2 below.
1 Roger Miller, Economics Today the Micro View (Addison-Wesley,16th ed, 2012).

b. Adoption of new machines increasing the productivity of the industry
Technological improvement in production of cotton jumpers in the industry
affects the supply of the cotton jumpers. It makes production cheaper because the
producers spend less on inputs yet producing the same output and thus increasing the
number of cotton jumpers produced at any given price see.2 As such the supply curve
shifts to the right as shown in fig. 2.3 below. As it can be seen from the panel for fig. 1.3:
at price Pf, the quantity produced after introduction of technology is higher than the initial
quantity supplied at the same price. Notably, the equilibrium price also declined from E1
to E 2 after the introduction of advanced production technology.
c. The rise in income of the consumers
Assuming that the nature of woolen jumpers is normal goods, an increase in
income of the consumers will mean they will end up demanding more of the jackets and
thus shifting the demand curve to the right, generally see.3 The increase in the demand
leads to a fall higher equilibrium price assuming that the supply remained constant as
shown in the fig 1.4 below.
2 Paul Krugman and Robin Wells, Economics (Worth Publishers, 3rd ed,2013).
3 Ibid.