Discuss the 5 determinants of demand for a specific good: peanut butter. For each of the 5 shifters, give an explicit example of a change in an external factor that shifts demand for peanut butter, then indicate whether your particular example would increase (shift rightward) or decrease (shift leftward) the demand for peanut butter.

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Lelia LubowitzLv2

5 Jul 2019

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Learning Objective: In terms of macroeconomics; Be comfortable with what shifts the supply and demand curve, and how shifts in either supply or demand or both supply and demand change equilibrium quantity and equilibrium price.

You must answer both. Strategy: explain whether each factor changes supply or demand and in what direction.

1. Music compact discs are normal goods. What will happen to the equilibrium price and quantity of music compact discs if musicians accept lower royalties, compact disc players become cheaper, more firms start producing music compact discs, and music lovers experience an increase in income?

2. What would happen to the equilibrium price and quantity of peanut butter if the price of peanuts went up, the price of jelly fell, fewer firms decided to produce peanut butter, and health officials announced that eating peanut butter was good for you?

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1. Anna owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town to be 2.5. If she wants to increase her total revenue, what advice will you give her and why? Explain your answer.

2. If the cross elasticity of demand between peanut butter and milk is -1.11, then are peanut butter and milk substitutes or complements? Explain your answer.

3. A 10 percent increase in income brings about a 15 percent decrease in the demand for a good. What is the income elasticity of demand and is the good a normal good or an inferior good? Explain your answer.

4. If the price of a good increases by 8% and the quantity demanded decreases by 12%, what is the price elasticity of demand? Is it elastic, inelastic or unitary elastic?

5. Discount stores sell relatively elastic goods. Ceteris paribus, explain why selling at a relatively low price is profitable for them?

Changes in demand factors other than the price of the good would result in a change in demand.

a. An increase in demand is depicted as a rightward shift in the demand curve.

b. An increase in demand means that consumers plan to purchase more of the good at each possible price.

c. A decrease in demand is depicted as a leftward shift of the demand curve

d. A decrease in demand means that consumers plan to purchase less of the good at each possible price.