a) A scientific report is released which links chocolate consumption to a decrease in heart disease.
This first question relates to the issue of demand. In economics we undergo a number of assumptions when considering the relationship between price and quantity demanded. A basic requirement for this approach is to view price as the most important aspect and other factors as constants. We refer to this as the ‘Ceteris Paribus’ (other-things-equal) assumption. The other factors are named the determinants of demand and constitute the “other things equal”. They are the following: Consumer Tastes, Number of buyers, Income, Prices of Related Goods and Future Expectations. The law of demand, which states an inverse relationship between price and quantity demanded, is based on these assumptions. Should a change occur in one of the determinants of demand, the entire situation changes and the demand curve shifts either to the left or right respectively, depending on whether the change is positive or negative for the product.
The market equilibrium occurs at the point where the demand and supply curves intersect- that is, where the quantity demanded is equal to the quantity supplied. In the case where scientists establish that chocolate decreases the risk of heart disease, this creates a belief in consumers that eating chocolate is healthy. Due to this, consumers gradually change their tastes and preferences towards buying more chocolate at any given price. Thus the general demand increases as the determinant “tastes” does not remain constant. The result, shown as D2 in fig 1.1, is a rightward shift of the demand curve as this signifies a favorable change in the product’s demand.
Graphically we see in fig 1.1 that both curves intersect further to the right and higher upward, therefore changing both the equilibrium price (which increases from p1 to p2) and the equilibrium quantity (which increases from q1 to q2). The scientific report has thus... [continues]
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