Business Environment Demand and Supply Assignment

Business Environment Demand and Supply - Assignment Example 2. If the price of Snickers increases, then the substitute for the Mars bar has become more expensive. As a result at each price, people will buy more Mars bars. Therefore, at each price there will be a higher quantity demanded of Mars bars. So the demand for Mars bars will increase. In figure 2 suppose the initial demand curve at the old price of Snicker bars is D0. This curve shows at price ?0.6 per unit of Mars bars, Q1 units are demanded. Now if the price of Snickers bars goes up, at the same price of Mars bars, more units are demanded. So, the demand curve shifts up to D1. In this new situation, at the old price of Mars bars Q2 units are demanded. Figure 2: Effect of increase in the price of substitutes 3. In figure 3, D0 is the initial demand line for Strawberries. If the price of cream fell, then a unit of Strawberries and cream together is less expensive. Since Strawberries and cream is consumed together, the quantity demanded of strawberries and cream together rises. As a re sult, at each price, the quantity demanded of Strawberries is now higher. So, the demand curve for Strawberries shifts out to the right to D1. Figure 3: Effect of fall in price in cream on demand for Strawberries 4. If the interest rate increases, then people have to pay more to repay the same amounts of loans. As a result, the income falls. If income falls, given the same price of cars, people can afford to buy fewer cars. Therefore, at every price, the quantity demanded of cars falls. As a result, there is a decline in the demand of cars. This is shown in figure 4. The demand for cars drops from D0 to D1. Figure 4: Effect of rise in interest rates on demand for cars 5. If the cost of production of Mars bars falls, then every unit of Mars bars can be supplied at lower price. Therefore, at each price the quantity supplied increases. This leads to an outward shift in the supply on the Mars bars. The effect is shown in figure 5 below. The initial demand and supply curves are D0 and S0 respectively. The equilibrium occurs at point A where these two curves intersect one another. Note from the vertical axis that at the initial equilibrium the price is 0.6p. Now, suppose the production cost falls. As a result, the supply curve shifts out to the right to S1. The new equilibrium is point B. Note from the vertical axis, the new equilibrium price of Mars bars is lower than the initial equilibrium price. Figure 5: Effect of reduction in producing costs 6. In figure 6, the effect of a reduction in a tax on the sales of the product is shown. Suppose initially, the tax is ‘t’. The relevant supply curve is S0+t. If the tax is taken off, the cost of the firm goes down, as a consequence the firm can supply more at each price. The supply curve without the tax is S0. Observe, if a tax is charged, then to supply an output of Q1 the firm has to charge a price of P0+t. But if there is no tax, the firm can supply the same output at a lower price of P0. Therefore, the ef fect of a reduction in tax is to shift the supply curve out to the right. Figure 6: Effect of a reduction in tax on the supply 7. If there is an increase in technology, the inputs become more productive. As a result, at the same per unit cost, the firm can now produce more. Therefore, at each price, the firm now is able to offer a higher quantity supplied. Therefore, due to the improvement in technology, the