Principle of Economics: Demand Curve, Supply and Equilibrium

Running Head: PRINCIPLE OF ECONOMICS
Principle of Economics
Name of the Student
Name of the University
Course ID

1PRINCIPLE OF ECONOMICS
Table of Contents
Answer to question 1.......................................................................................................................2
Answer to question 2.......................................................................................................................2
Answer to question 3.......................................................................................................................4
Answer to question 4.......................................................................................................................7
Answer to question 5.......................................................................................................................7
Reference list.................................................................................................................................10

2PRINCIPLE OF ECONOMICS
Answer to question 1
Demand curve depicts the relationship between price and quantity demanded of a goods.
Following an inverse relation between price and demand of a particular good, demand curve
slopes downward. The upward sloping demand curve indicates a positive relation between
demand and price. For this is to be the case, demand should rise with a rise in demand. Behavior
towards demand however depend on number of other factors in addition to price. Sales of beef
increases along with a rise in beef price. Price is not the only factor that influence beef demand.
Different substitute of beef like chicken, lamb and others are available in the market
(Hildenbrand 2014). People increases the demand for substitute when this seems relatively
cheaper. It might be possible that price of substitute increases by a larger magnitude than prices
of beef. If this is the case, then despite increase in beef price people continue to purchase beef, as
it remains relatively cheaper. This however does not imply beef demand curve to slope upward.
Without knowing, the state of other demand influencing factors it cannot be concluded that
demand curve for beef is upward sloping.
Answer to question 2
a)
Poor harvest of wine grapes reduces supply of wine grapes. In preparing wine, the primary input
is wine grapes. An interrupted input supply affect production of final goods as well. The reduced
supply of wine grapes reduces production of French wine. Supply of French wine reduces
shifting the supply curve upward (Baumol and Blinder 2015). As supply contracts, the available
supply falls short of demand. Shortage of supply in the French wine affects the equilibrium price

3PRINCIPLE OF ECONOMICS
and quantity. Under new equilibrium condition price increases while equilibrium quantity
reduces.
Figure 1: Poor harvest and French Wine market
(Source: as created by Author)
In the French wine market, the supply curve S0S0 to the left to S1S1. As a result, the equilibrium
shifts up to E1. Equilibrium price in the market increases to P1 while equilibrium quantity
declined to Q1.
b)
Australian wine is a substitute of French wine. In case of substitute goods, price of one good
affects the demand for its substitute. Increased price in the French wine market reduces demand
for French wine. People tend to substitute French wine with Australian wine. As the demand for