Economic Principles

Running head: ECONOMIC PRINCPLES
Economic Princples
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1ECONOMIC PRINCPLES
Table of Contents
Question 1........................................................................................................................2
Question a.................................................................................................................... 2
Question b.................................................................................................................... 2
Question c.................................................................................................................... 3
Question 2........................................................................................................................4
Question 3........................................................................................................................5
Question 4........................................................................................................................7
Question 5........................................................................................................................9
References.....................................................................................................................11

2ECONOMIC PRINCPLES
Question 1
Question a
When price of a substitute good decrease, there is a decline in demand for the
certain good. A decrease in price of leather jackets encourages people to use more
leather jackets in place of woollen jumpers. As demand for woollen jumpers decreases,
the demand curve for woollen jumpers shifts to the leftward direction (Sloman and
Jones 2017). As demand for woollen jumpers decreases, the equilibrium price and
quantity of woollen jumpers decreases as well.
Figure 1: Effect a decrease in price of leather jackets
The demand and supply of woollen jumpers are presented by the curve DD and
SS respectively. When price of leather jackets, a substitute of woollen jumpers’
decreases, this reduces demand for woollen jumpers. As the demand curve shifts
inward to D1D1, equilibrium shifts from E to E1. Equilibrium price reduces to P1 while
equilibrium quantity for woollen jumpers decreases to Q1.
Question b
Adoption of new machine, which increases productivity within the knitting industry
increases supply of woollen jumpers. The increase in supply increases makes more

3ECONOMIC PRINCPLES
woollen jackets available at every price (Hill and Schiller 2015). The new machines thus
affect supply curve of woollen jumpers, which shifts to rightwards direction. The
increase in available supply increases equilibrium quantity while equilibrium price of
woollen jumpers falls as shown below.
Figure 2: Effect of adoption of new technology in the woollen industry
Adoption of efficient productive technology in the woollen industry increase
supply of wollen jumpers shifting the supply curve to the right. Corresponding to the new
equilibrium, price of wollen jumpers fall while equilibrium quantity of woollen jumpers
increases.
Question c
For a normal good, an increase in income increases demand for the good. Given
that, woollen jumpers are normal goods, an increase in income increases demand for
woollen jumpers. Increase in demand, shifts the demand curve to the right increasing
both equilibrium price and quantity as explained in the figure below.