ECON 1312
Introduction to Microeconomics
Section: 202
Micro. Project
Group members:
Lena Alqahtani
201000236
May Alkhaldi
201000442
Fatima Albaridi
200901970
Microeconomics Project
1- A new worm has destroyed olive trees
Olive trees have different uses and the destruction of such trees will affect the
products that are produced from olive trees and used for different purposes. Olive fruit
is used to produce olive oil which is used in cooking and soap manufacturing etc.
The olive oil market will be affected by destruction of olive trees by the worm,
resulting in reduction of the supply of olive oil. The reduction in the supply of olive
oil in turn, demand being unchanged and assuming perfect competition, the price of
olive oil will go up. The other vegetable oil markets will be affected too, such as
soybean oil; consumers in response to the increase in the price of olive oil will cut
olive oil consumption and increase the consumption of low price other vegetable oils
thus increasing the demand in these markets.
Graph 1: Olive Oil Supply Curve
Price
D
S2
S1
P2
E2
P1
E1
Q2
Q1
Quantity
Graph 1 show the olive oil supply curve, S1 is the original supply curve, and S2 is the
new supply curve resulting from reduction of the supply of olive oil from Q1 to Q2
due to destruction of olive trees, and D is the original demand curve which remains
unchanged. E1 is original equilibrium with quantity Q1 and price P1. E2 represents
the new equilibrium with new quantity Q2 and new price P2.
The effects on other vegetable oils for example soybean is shown in graph 2 below.
Graph 2: Soybean Oil Demand Curve
Price
P2
P1
D1
Q1
D2
Q2
Quantity
Graph 2 shows that the demand for Soybean oil has increased resulting in the
demand curve shifting to the right from D1 to D2.
Since the olive oil and the soybean oil are substitutes the effect is positive.
Increase in the demand for soybean oil will ultimately lead to an increase in the price
of soybean oil as supply of soybean will not be with infinite quantities to satisfy
increase in demand.
2- Heat wave destroyed the grape crop
Grapes are either eaten as raw or used in medicine, raisins, jelly. The seeds are used in
making wine. Substitutes of grape may other types of fruit such as kiwi fruit.
The event will affect the grape market, jelly market as well as the kiwi market.
The direct affected market is the market of raw grape as such destruction will cause a
fall in the supply of grape and therefore there will not be enough grapes to satisfy
current demand resulting in high prices of grape.
Graph 3: grape supply curves
Price
S2
D E2
P2
S1
E1
P1
D
Q2
Q1
Quantity
Graph 3 depicts the original grape supply curve S1 and quantity Q1 at price P1 at the
equilibrium E1. Due to the reduction in the supply of grape the supply curve shifted
upwards resulting in reduction of quantity supplied from Q1 to Q2 and a resulting
increase of price from P1 to P2 at the new equilibrium E2.
The kiwi fruit market is affected also as the price of grape has gone up some
consumers will not afford buying grapes; hence they will shift to the consumption of
kiwi fruit resulting in increased demand for kiwi fruit.
Graph 4 shows the effects of more demand created by a shift from consumption of
grape to the consumption of kiwi fruit leaving the demand curve to shift to the right
from D1 to D2.
Graph4:Kiwi Fruit Demand Curve
Price
P2
P1
D1
Q1
D2
Q2
Quantity
Since grapes and kiwi fruit are supplements the effect is positive as increase in the
prices of grapes due to supply shortage resulted in increased demand for kiwi fruit.
3- Oil Prices are Noticeably Going up this Month
Oil is a vital product that affects human live across different industries any change in
prices will have multiple effects on different markets.
The direct affected market is the oil market and other markets are also affected too,
for example, the automobile market.
An increase in the oil price according to supply rule will encourage producers to
supply more of the product as far as the market is competitive. An increase in the
price of oil will cause a movement along the supply curve as shown in graph 5.
Graph 5: Epoxy Resin Supply Curve
Price
P2
E2
E1
P1
Q1
Q2
Quantity
As the graph illustrates an increase in oil price from P1 to P2 will cause a movement
along the supply curve increasing the quantity supplied from Q1 TO Q2.
On the other hand an increase in the oil prices will affect the automobile industry by
decreasing demand for automobiles. Demand for automobile will decrease because
automobiles and oil are complements in that the oil price has increased while the
demand for automobiles decreased as such the effect is negative.
Graph 6: The effects of increase of oil prices on the demand for automobiles
Price
S
D
P2
P1
Q1
Q2
Supply of Oil
Q2
Q1
Demand for automobiles
As indicated by graph 6 an increase in price of oil from P1 to P2 increased the
quantity supplied of oil from Q1 to Q2. At the same time an increase of the price of
oil from P1 to P2 caused the demand for automobiles to fall from Q1 to Q2.
4- Gas Price is expected to go Down Next Month
A decrease in the price of gas will affect the gas market by discouraging producers
and leading to a reduction in the supply of gas as the supply rule dictates.
A decrease in the prices of gas will cause a movement along the supply curve to the
down left side resulting in lower supplied quantities.
Table 7: Gas Supply Curve
Price
S
P1
P2
Quantity
Q2
Q1
As table 7 shows a decrease in price of gas will force the supply of gas to drop from
Q1 to Q2.
On the other hand, a decrease in the prices of gas will affect the automobile industry
partially by increasing demand for automobiles that use gas as such gas and
automobiles are complements and the effect is negative because the decrease in gas
prices resulted in an increase in the demand for automobiles.
The increase in demand for automobiles causes a downward movement along the
demand curve.
Graph 8: Demand for Automobiles
Price
D
P1
P2
D
Quantity
Q1
Q2
As table 8 states a decrease in the price of gas to P2 will cause a movement along the
demand curve from Q1 to Q2.
5- The price of beef is expected to go up next month
Beef constitutes an important part of many types of food and similarly the production
of beef is affected by the availability and prices of cows and crops.
An increase of price of beef will affect the markets for beef, cow, crops, food, other
sources of meat, etc.
An increase in the prices of beef will cause the quantity supplied to increase in
response to such increase in prices. This will cause a movement along the supply
curve to the right.
Graph 9: Beef Supply Curve
Price
S
E2
P2
E1
P1
Quantity
Q1
Q2
Graph 9 states that as the price of beef increases from P1 to P2 suppliers in response
to increase in prices will supply Q2 of beef instead of Q1.
On the other hand, the increase of price of beef will reduce the demand for
hamburger. Beef and hamburger are complements products because the increase of
the price of beef resulted in a decrease in the quantity demanded of hamburger, and
therefore the effect is negative.
Table 10: Hamburger Demand Curve
Price
D
P2
P1
Quantity
Q2
Q1
The hamburger demand curve tells us that due to increase in the price of beef from P1
to P2 the demand for hamburger went down from Q1 to Q2.
Conclusion
In this paper we explored the effects of changes in prices and quantities on supply and
demand sides of different supplement and complement products.
A forced reduction in supply for a product will tend to reduce the quantity supplied of
that product resulting in increased prices of the product while opening the door for the
demand for substitute products to pick up as in the case of olive oil and soybean oil
and similarly the grape and kiwi fruit markets. The effect of such changes is positive.
An increase in the price of a product will encourage producers to supply more of that
product in response to that price increase and at the same time will result in the
reduction of demand for complement products with a negative effect as in the case of
oil and automobile and beef and hamburger markets.
A decrease in the price of a product will discourage producers and hence they cut
production. At the same time the demand for complement products will pick up as in
the case of gas and automobile markets.