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On 19 December 2013, the following news item was printed in the Economic Times: Households in Southern India prefer to eat oranges for breakfast as banana plantations in Kerala have been destroyed and price of apples and grapes have also risen. Use a diagram and economic theory to analyse the impact of the rise in price of apples and grapes on the market of oranges. |
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Answer» Solution :When the price of apples and grapes RISES, CONSUMERS will SUBSTITUTE with these fruits with the relatively cheaperT oranges. Thus, demand for oranges will increase and the demand curve shifts rightwards from DD to `D_(1)D_(1)`. With new demand curve D,D,, there is excess demand at initial price OP because at price OP demand is PB and supply is PA, so there is excess demand of AB at price OP. Due to this excess demand, competition among the consumer will RAISE the price. With the rise in price there is upward movement along the demand curve (contraction in demand) from B to C and similarly, there is upward movement along the supply curve(expansion in supply) from A to C. So, finally, equilibrium price rises from OP to `OP_(1)` and equilibrium quantity also rises from OQ to `OQ_(1)` Note: Therefore, the equilibrium price of oranges increases and the equilibrium quantity also increases when the price of apples and grapes rises in Southern India. Value: ANALYTIC ` (##FM_M_ECO_XII_P1_C12_E02_063_S01.png" width="80%"> |
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