Assume that the weather in Florida is exceptionally cold this year and has damaged the citrus crops, raising the costs for the companies that use a lot of oranges to produce orange juice. Indicate which of the following statements describing the resulting effects in the market for orange juice are true of false.
#1. The demand for orange juice decreases.
#2. The quantity of orange juice demanded decreases.
#3. The supply of orange juice decreases.
#4. The quantity of orange juice supplied decreases.
When faced with a question like this, the first thing to determine is whether this problem deals with a change in supply or a change in demand. In this problem we are discussing the costs of production for orange juice producers. We don’t see any information mentioned about the consumers who purchase orange juice. This tells us two things: a change in the production costs leads to a shift in the supply curve, but the habits of consumers have not changed so there is no shift in the demand curve. Now we can determine that #1 is false because there is no change in the demand for orange juice.
Now that we know a change in the production costs causes a shift in the supply curve, but we need to know how the curve shifts and what else that impacts. If the costs of producing have gone up, the producer will want charge more for each unit of orange juice produced to cover the increased costs. This means that at each price point the supplier is willing to produce fewer units of orange juice than before, which shifts the supply curve to the left and represents a decrease in supply.
This demonstrates that #3 is true because the supply of orange juice decreases, represented by the graph above.
Taking a look at this graph further, we can see that the new equilibrium point is at P1 and Q1, which shows an increase in price and a decrease in quantity. This shows that the quantity demanded has decreased, because when the supply curve shift the quantity moves along the demand curve. Thus, we know that #2 is true because the quantity demanded of orange juice decreases.
The last part of the question some students find to be a bit tricky. Since we have a completely new supply curve, where the quantity supplied is different at every price point, we simply refer to it as a decrease in supply, or shift to the left of the supply curve. Thus, this situation does not represent a movement along the supply curve, so #4 is false.
#1. The demand for orange juice decreases.
#2. The quantity of orange juice demanded decreases.
#3. The supply of orange juice decreases.
#4. The quantity of orange juice supplied decreases.
When faced with a question like this, the first thing to determine is whether this problem deals with a change in supply or a change in demand. In this problem we are discussing the costs of production for orange juice producers. We don’t see any information mentioned about the consumers who purchase orange juice. This tells us two things: a change in the production costs leads to a shift in the supply curve, but the habits of consumers have not changed so there is no shift in the demand curve. Now we can determine that #1 is false because there is no change in the demand for orange juice.
Now that we know a change in the production costs causes a shift in the supply curve, but we need to know how the curve shifts and what else that impacts. If the costs of producing have gone up, the producer will want charge more for each unit of orange juice produced to cover the increased costs. This means that at each price point the supplier is willing to produce fewer units of orange juice than before, which shifts the supply curve to the left and represents a decrease in supply.
This demonstrates that #3 is true because the supply of orange juice decreases, represented by the graph above.
Taking a look at this graph further, we can see that the new equilibrium point is at P1 and Q1, which shows an increase in price and a decrease in quantity. This shows that the quantity demanded has decreased, because when the supply curve shift the quantity moves along the demand curve. Thus, we know that #2 is true because the quantity demanded of orange juice decreases.
The last part of the question some students find to be a bit tricky. Since we have a completely new supply curve, where the quantity supplied is different at every price point, we simply refer to it as a decrease in supply, or shift to the left of the supply curve. Thus, this situation does not represent a movement along the supply curve, so #4 is false.
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