ECO204-Principles of Microeconomics
Prof. Evelyn Bolden
Supply and Demand Curves
Do you agree or disagree with each of the following statements? Briefly explain your answers.
1. The price of a good rises, causing the demand for another good to fall. The goods are therefore substitutes.
Substitute goods are those that can be used in place on one another -- Pepsi and Coke, for example. Substitutes are different goods that compete with the one under consideration. Therefore is the price of Pepsi goes up, it caused for Coke to increase its demand not fall. As a result, I disagree with the ...view middle of the document...
However, the demand for some products falls when income rises. Goods for which demand decreases when income rises are known as inferior goods. Usually an inferior good is one that is considered less desirable than more expensive alternatives—such as a bus ride versus a taxi ride. When they can afford to, people stop buying an inferior good and switch their consumption to the preferred, more expensive alternative. So when a good is inferior, a rise in income shifts the demand curve to the left. And, not surprisingly, a fall in income shifts the demand curve to the right. As a result I disagree with the above statement.
Increase in income: X is a normal good
Increase in income: X is an inferior good
4- Two normal goods cannot be substitutes for each other.
Normal goods are goods that are consumed at greater quantities as income rises. For an increase in income the demand curve for normal good shifts to the right. People consume a greater amount of a normal good at all prices as their incomes rise. Now, can normal goods be substitutes for each other? If two goods are substitutes, we should expect to see consumers purchase more of one good when the price of its substitute increases. Yes, normal goods can be substitutes. Two normal goods are shown in the graph below. Let’s assume we know the consumer's budget line. If income increases, the budget line will move outward. Then the demand for both goods will go up, so they are normal. If the price of good x goes up relative to y, the budget line will steepen. Then the demand for x will decrease and the demand for y will increase, so they are substitutes. Therefore, I agree with the above statement.
5- If demand increases and supply increases at the same time price will clearly rise.
This statement is partially true. When the market shows a high demand over the quantity supplies, the price tends to rise. For example during Katrina housing rental and sales prices sky...