Economic Theory

Questions: a). Explain using a diagram what would happen in the market for car tires if at the same time there was an increase in the prices of rubber used in the production of tires and a decrease in the price for cars. Explain the effects on price and quantity. b). In a perfectly competitive market for apples explain would happen in the shortrun to the market and to individual producers if the price for pears went up. Demonstrate your answer using a diagram. With reference to the same diagram show what would happen to the market and individual producers in the long-run. Answers: a). the law of demand states that when there is an increase in demand for an item the price of the item rises. In this case the price of rubber shots up therefore production of tires is going to be expensive which will lead to either production of less number of car tires or increase in prices for the car tires. On the other hand, decrease in prices of cars will lead to high demand of car tires because more cars will be bought. This means that demand will increase from D1 to D2 , Subsequently the price of car tires will increase from P1 to P2. b). Perfect competition is more convenient because: there is a large number of buyers, there is a product homogeneity, market transparency and freedom of entry and exit for businesses. When the price of pears increase from P0 to P1 then there will be more production of pears in the short run where the demand of the pears will drop. In the long run the prices will drop from P1 to P0 because over the over supply of pears. The higher is the price of a good, the less the amount that will be demanded, while remaining all else being equal. We have found that the demand for a good depends not only on price but also on the income of consumers, in addition there are other factors that interfere in demand. Market Equilibrium: when supply and demand agree on the price at which the product can be marketed, as well as the amounts they are willing to exchange at that price, we say that the market is balanced. References Allgood, S. and Bayer, A., 2016. Measuring College Learning in Economics. Improving Quality in American Higher Education: Learning Outcomes and Assessments for the 21st Century, p.87. Attarzadeh, A., 2016. The Correlation of Economic Variables on Domestic Investment. World Academy of Science, Engineering and Technology, International Journal of Social, Behavioral, Educational, Economic, Business and Industrial Engineering, 10(5), pp.1203-1206.