MENU
Question -

Using supply and demand curves, show how an increase in the price of shoes affects the price of a pair of socks and the number of pairs of socks bought and sold.



Answer -

  1. As we know, shoes and pair of socks are complementary good to each other. As, price of complementary goods are inversely related with the demand of given commodity. So, rise in price of shoes (complementary good) decreases the demand for given commodity (pair of socks), and demand curve shifts leftward as shown in given figure:
                         
  1.  In the given diagram, price is on vertical axis and quantity demanded and supplied is on horizontal axis. Initially, the equilibrium price is OP and equilibrium quantity is OQ.
  2. But due to rise in price of complementary good the demand curve of given commodity shifts leftward from DD to D1D1.
  3. With new demand curve D1D1 there is excess supply at initial price OP because at price OP demand is PB and supply is PA; so, there is excess supply of AB at price OP.
  4. Due to this excess supply, competition among the producer will fall the price. Due to fall in price, there is downward movement along the demand curve (Expansion in demand) from B to C and similarly there is downward movement along the supply curve (Contraction in supply) from A to C. So, finally, the equilibrium price falls from OP to OP1 and equilibrium quantity also falls from OQ to OQ1 So, due to rise in price of complementary goods,
(a) Equilibrium price falls from OP to OP1 and
(b) Equilibrium quantity also falls from OQ to OQ1

Comment(S)

Show all Coment

Leave a Comment

Free - Previous Years Question Papers
Any questions? Ask us!
×